Pub. Serv. Co. of New Hampshire v. Comm'r of Internal Revenue
| Decision Date | 22 March 1982 |
| Docket Number | Docket No. 15665-79. |
| Citation | 78 T.C. 445 |
| Parties | PUBLIC SERVICE COMPANY of NEW HAMPSHIRE, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner, a regulated electric utility, reported its income on an accrual calendar year basis and utilized the meter reading and billing cycle of accounting for sales of electricity. Sales of electricity after the last meter reading in December were not billed to customers until after the close of the calendar year. On its income tax return for that year, it deducted the expenses but did not report the income attributable to such sales. It did, however, reflect such income on its books of account and financial statements. Because of the foregoing disparity, respondent determined that income was taxable because the requirement of uniformity of treatment for income tax purposes and financial accounting contained in Rev. Rul. 72-114, 1972-1 C.B. 124 () had not been satisfied. Held, under the particular circumstances herein, the uniformity requirement of Rev. Rul. 72-114 should not be applied, and petitioner's method of reporting income and expenses in respect of its post-meter reading but prebilling sales in December is sustained. Harry K. Mansfield, for the petitioner.
David N. Brodsky, for the respondent.
Respondent determined deficiencies in petitioner's Federal income taxes as follows:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦1968 ¦$96,097 ¦
+------+-------------¦
¦1971 ¦71,097 ¦
+------+-------------¦
¦1972 ¦726,906 ¦
+------+-------------¦
¦1975 ¦1,183,857 ¦
+--------------------+
The sole issue presented is whether petitioner may use a method of accounting for filing its tax returns which causes it to defer until 1976 recognition of income attributable to certain sales of electricity occurring in December of 1975.1
This case was submitted fully stipulated pursuant to Rule 122.2 The stipulation of facts is incorporated by this reference.
Petitioner is a New Hampshire corporation engaged in the electric utility business and is the largest electric utility in New Hampshire. It operates a single integrated system furnishing electric service to more than 250,000 customers in over 190 New Hampshire municipalities, including about 83 percent of the total population of that State, and in 6 towns in Vermont and 13 towns in Maine. Petitioner timely filed consolidated corporation income tax returns for the calendar years 1968, 1971, 1972, 1974, and 1975 on the accrual method with the Internal Revenue Service Center at Andover, Mass.
Petitioner distributes electricity to several classes of retail customers, including residential, commercial, and industrial customers. The rates charged to retail customers in New Hampshire, Maine, and Vermont are subject to the regulatory authority of the New Hampshire Public Utilities Commission (NHPUC), the Public Utilities Commission of Maine (MPUC), and the Vermont Public Service Board (VPSB).
Under the rules of the NHPUC, the VPSB, and the MPUC, petitioner is required to file tariffs for retail customers setting forth the rates charged by category of customer and the terms of service. These tariffs are subject to the approval of the regulatory agency with which they were filed. The tariffs so filed with the NHPUC, the VPSB, and the MPUC, applicable in 1974 and 1975, all provided for a basic charge per kilowatt hour of electricity sold which decreased as the amount of electricity delivered to a customer during a billing period increased and further provided in some instances for demand charges or discounts based on long hours' use during the monthly billing period.
The tariffs for wholesale customers, such as other power companies, applicable to petitioner in 1974 and 1975, were subject to the regulatory authority of the Federal Power Commission. The tariffs were contained in contracts filed with the Federal Power Commission and provided for a charge based upon maximum demand during the monthly billing period.
The tariffs for both retail and wholesale customers provided that customers were to be billed monthly. For example, section 2b of the general tariff approved by the New Hampshire Public Utilities Commission provided in part:
b. Charges for service under rates in this Tariff are predicated upon monthly billing, which as far as practicable will be thirty (30) days apart, and will be due upon presentation of bill. * * *
The specific tariffs approved by the NHPUC for various classes of service stated that the rate for the particular class was “net, billed monthly and payable upon presentation of bill.” The tariffs governing petitioner's business further provided that petitioner could not discontinue service for nonpayment unless a bill was unpaid for a specified period of time. In order to engage in other than monthly billing, new tariffs would have to have been submitted by petitioner to the appropriate regulatory agencies and approved by them.
In accordance with the tariffs, petitioner read meters and billed its customers on a monthly basis in 1974 and 1975. Meters were not all read at month's end but instead were read on a cycle basis with a particular meter's being read on a day each month approximately 1 month from the prior reading of the meter. Residential meters were read at evenly spaced intervals over the month while industrial and other large customer meters were usually read toward the end of any month. Bills for electricity used by the customer during the monthly billing period (or, in instances where a meter could not be read, estimated to have been used) were sent to customers within approximately 10 days from the meter reading date. The amount so billed was, however, credited to revenue in the month in which the meter reading took place and was debited to accounts receivable in that month with the result that a meter read on December 31 was considered December revenue even though the bill was not sent out until the following year.
From at least as early as 1934, petitioner consistently, for income tax purposes, accrued revenue from the sale of electricity on the basis of its meter reading and billing cycle, the so-called meter reading and billing cycle method. Under this method, petitioner accrued as income all amounts billable during the year based upon its meter reading cycle. In each year, therefore, petitioner accrued the gross income billable for the electricity used (or, in instances where a meter could not be read, estimated to have been used) by each customer for all meter reading dates falling within the year. As a consequence, the income accrued during the year for a particular meter would include revenue billable for electricity delivered during the period from the meter reading date falling in December of the prior year through the end of the prior year. The income accrued during the year did not include any income in respect of electricity delivered during the period from the meter reading date falling in December of that year to the end of that year, the so-called unbilled revenue. Petitioner deducted for Federal income tax purposes the costs of producing and delivering electricity in the year that the production and delivery occurred, with the result that, in each year, it deducted such costs for the period after the last meter reading date in the year through the end of the year, but did not deduct such costs for the period after the last meter reading date in the prior year through the end of the prior year. The costs of meter reading and billing for electricity delivered after the last meter reading date in the year were not, however, deducted currently as these activities had not been performed by the end of the year.
In contrast with the method of accounting used for Federal income tax purposes, petitioner recorded estimated unbilled revenue at the end of the year for book and financial accounting purposes (but not income tax purposes), a practice which it had followed from at least as early as 1934. The unbilled revenue was included in income by petitioner in all its certified financial reports submitted to shareholders, creditors, and regulatory agencies. The amount of unbilled revenue so recorded as income for book and financial accounting purposes was not, however, included within the accounts receivable in the financial accounts of the petitioner but was instead included in a separate category entitled “Unbilled Revenue” included within the current assets of the petitioner.
The estimate of unbilled revenue recorded for book purposes was an aggregate estimate and was not based on a customer-by-customer estimate of electricity used between the last meter reading date in the year and the end of the year. In addition, the method of estimating the unbilled revenue changed in 1975. For 1974, the amount so recorded was equal to a 12-month moving average of the estimated aggregate unbilled revenue at the beginning of each month during the year for petitioner's residential and commercial customers and a 4-month moving average of the estimated aggregate unbilled revenue at the beginning of the months of September through December 1974 for petitioner's industrial, wholesale, and other large customers. During 1975, the amount so recorded was equal to a 12-month moving average of the estimated aggregate unbilled revenue at the beginning of each month of the year for all customers. In calculating the moving average, the aggregate unbilled revenue at the beginning of any month was estimated by multiplying the revenue actually accrued in the month through the meter reading date in the month (determined for a particular customer or group of customers whose meters were read on a particular date) by a fraction the numerator of which was the number of days in the billing period falling within the...
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