Tampa Electric Co. v. Commissioner of Internal Revenue
| Decision Date | 29 June 1928 |
| Docket Number | 29593.,Dockets No. 13344,28332 |
| Citation | 12 BTA 1002 |
| Parties | TAMPA ELECTRIC CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
George W. Matthews, Esq., for the petitioner.
Orris Bennett, Esq., and Hartford Allen, Esq., for the respondent.
These proceedings, which were consolidated for hearing and decision, arise from the determination of deficiencies of $1,462.09, $8.92, $3,423.11, $2,370.93, and $219.09, in income and excess-profits taxes for the years 1920, 1921, and income tax for the years 1922, 1923, and 1924, respectively. The issues are:
1. Years 1920, 1922, 1923, and 1924. Whether amounts paid to the petitioner toward the cost of making extensions of its transmission lines to the premises of the contributors constitute taxable income.
2. Year 1921. Whether error was committed in the adjustment of invested capital on account of the deficiency determined for the year 1920.
3. Year 1922. (1) The amount of loss or profit sustained or made because of the loss of a building by fire, compensated for by insurance, and (2) whether respondent erroneously disallowed as a deduction the cost of certain repairs made to property damaged by a storm occurring in 1921.
4. Year 1923. The correct amount of profit realized on the sale of certain real estate.
As an alternative to the first issue, respondent asks that in case we hold against him for 1920 the amount received in 1920 be excluded from invested capital for 1921.
FINDINGS OF FACT.
The petitioner is a Florida corporation with its principal place of business at Tampa.
During the taxable years the petitioner was engaged in the business of generating and, with two subsidiaries, distributing electric current for power and lighting purposes in Tampa, Winter Haven, Plant City, and adjacent territory. It also operated a street railway in the City of Tampa. During the years covered by the first issue a considerable number of persons residing beyond the districts then being served by the companies made application for electric current. Where, upon investigation, it was determined that the business to be obtained by an extension of their transmission lines did not justify the investment, an oral contract was entered into between the company and the applicant by the terms of which the latter was obliged to assume part of the cost of the extension. For extensions made in 1920, 1922, and 1923, the applicant for service was obliged to make an advance contribution of $10 for each pole necessary to reach his premises. Some time in 1923 the payments required of such applicants were increased to the rate of $30 per pole, with the understanding that for each new patron connected on the extended line during the life of the contract entered into between the parties for the extension, the applicant would receive a refund of $30. The amount refundable was not, however, to exceed the sum contributed. The "per pole" basis was an arbitrary method adopted as a convenient way of determining the cost of the extension to the applicant. The actual cost in every instance exceeded the amount contributed. All contributions were made in advance of the commencement of the work. Title to the extensions was in the name of the companies at all times. Upon completion of the extensions current was furnished the applicants at the same rates charged other customers, although they could have charged them higher rates. The petitioner depreciated the extended lines the same as it did other similar property owned by it.
The amount paid each year by applicants for these extensions, and which the respondent added to the income reported by the petitioner for the three companies in a consolidated return, was: 1920, $5,216; 1922, $3,112.40; 1923, $5,966.49; and 1924, $1,760. The latter amount represents the amount on hand in 1924 after the expiration of the time within which refunds were to be made to contributors for new patrons connected on their line. The sum of $5,219 received in 1920 was included in petitioner's invested capital for the year 1921.
For the year 1921, respondent decreased petitioner's invested capital by $617.78 on account of the deficiency of $1,462.09 for 1920.
In 1922 the petitioner owned a bathing pavilion located at Ballast Point Park, near Tampa. The main building was a frame structure, about 65 feet by 100 feet, having a dance hall on the first floor and twelve rooms on the second floor. The adjoining bathhouse was built over the water and contained between 30 and 40 rooms. The building was purchased in 1902 for $5,000. Additions were made in that year at a cost of $5,000, and in 1906 at a cost of $1,500.
The building was partially destroyed by storm in 1921 and certain repairs were made. The respondent has treated $6,632.53 of the cost of such repairs as capital expenditures and the petitioner concedes this treatment to be correct. The building was kept in good repair. After the destruction of the building by fire in 1922, the petitioner collected the sum of $20,000 from an insurance company with which the property was insured on account of the loss. The respondent determined a profit realized on the insurance by depreciating the original cost of the building, and additions made thereto, of $11,500 at 4 per cent per annum, leaving a depreciated cost of $3,000 in 1922. To this depreciated cost he added the capital expenditure of $6,632.52 and deducted the sum thereof ($9,632.53) from the $20,000 insurance received, thereby finding a profit of $10,367.47.
The petitioner expended the sum of $43,384.03 in 1921 and $13,904.96 during the first four months of 1922 in the repair of property damaged by a hurricane in October, 1921. The damage caused by the storm was so great and of such a nature that the petitioner was unable to complete all of the repairs in 1921 and it was not possible for petitioner's engineers to determine, or fairly estimate in 1921, the extent of the damages repaired in 1922. The petitioner was unable to render service for several weeks after the storm and its Bayshore line was out of service for about one month. The repairs made in 1922 were, in part, as follows:
Steam plant ____________________________________ $1,990.96
Lighting lines _________________________________ 1,276.70
Machinery ______________________________________ 579.49
Ballast Point Park pavilion ____________________ 4,134.29
Passengers cars (mechanical) ___________________ 1,402.15
Passenger cars (electrical) ____________________ 2,774.46
_________
Total ____________________________________ 12,158.05
In addition the petitioner paid a bill for dredging a certain fill washed into the bay by the storm. This work was done on the basis of a stipulated price per yard, and the actual cost could not be determined until the dredging was completed in March or April, 1922. The total cost of work done in 1922 as a result of the storm, $61,762.39, was charged to "Plant" and $13,904.96 to expense for repairs.
Upon an audit of petitioner's returns the respondent allowed as a deduction in 1921 the cost of repairs made that year, and disallowed as an expense item for 1922 the sum of $13,904.96 expended for repairs made during 1922.
Prior to March 1, 1913, the petitioner acquired at a cost of $3,238.50, or $1.50 per acre, 2,159 acres of land located near Tampa. A large portion of the land, not exceeding 75 per cent, was under from 6 inches to 6 feet of water during extremely wet weather. The property was thickly studded with cypress trees. The land was sold in 1923 for $21,590. On March 1, 1913, the fair market price or value was $5 per acre.
The facts in the first assignment of error, that of whether amounts paid to the petitioner in aid of the construction of extensions of its power lines to the premises of the contributors are taxable income, do not differ in any material respect from those in other similar cases heretofore decided by us, wherein we held contrary to the contentions raised by the respondent here. Following the principle laid down in those cases, the respondent is reversed. Liberty Light & Power Co., 4 B. T. A. 155; El Paso Electric Co., 10 B. T. A. 79; and Frank Holton & Co., 10 B. T. A. 1317. See also Edward v. Cuba Railroad Co., 268 U. S. 628.
In view of the fact that the elimination of the item of $5,219 from 1920 income will reduce the deficiency for that year, it follows that a recomputation of invested capital for 1921 will need to be made to reflect the prorated correct amount of the 1920 deficiency, if any remains after the adjustment. The Kolynos Co., 4 B. T. A. 520.
The invested capital returned by the petitioner for 1921 and determined by the respondent includes the sum of $5,219 received by the former in 1920 for making power line extensions. A similar situation was before us in the case of Frank Holton & Co., supra, wherein we held that no part of the cost of the property donated to the petitioner as an inducement to move its business to...
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