Texas Instruments Incorporated v. Commissioner

• Citation: 63 T.C.M. 3070
• Decision Date: 27 May 1992
• Docket Number: Docket No. 32707-88.
• Parties: Texas Instruments Incorporated and Its Consolidated Subsidiaries v. Commissioner.
• Court: United States Tax Court

63 T.C.M. 3070

T.C. Memo. 1992-306

Texas Instruments Incorporated and Its Consolidated Subsidiaries v. Commissioner.

Docket No. 32707-88.

United States Tax Court.

Filed May 27, 1992.

John S. Nolan, Alexander Zakupowsky, Jr., Jean A. Pawlow, Robin L. Greenhouse, and Robert E. Liles II, 655 Fifteenth St., N.W., Washington, D.C., for the petitioner. Deborah A. Butler, John S. Repsis, and Gary D. Kallevang, for the respondent.

TABLE OF CONTENTS

                Issue 1: Long-Term Contract and Overhead Adjustments ..............................   3071- 3
                      FINDINGS OF FACT ............................................................   3071- 3
                         Background ...............................................................   3071- 3
                         Overview of Petitioner's Accounting System ...............................   3071- 3
                         Costs Allocated Through Petitioner's 4000 and 6000 Series Accounts .......   3071- 4
                         Costs in Petioner's 8000 Series Accounts .................................   3071- 5
                         Casualty Loss ............................................................   3071- 6
                         Profit in Asset Depreciation .............................................   3071- 6
                         Purchase Cash Discounts ..................................................   3071- 6
                         Rework Labor and Scrap ...................................................   3071- 7
                         Tax Treatment ............................................................   3071- 7
                      OPINION .....................................................................   3071- 8
                         Completed contract Rules .................................................   3071- 8
                         The Parties' Positions ...................................................   3071- 8
                         Expert Testimony .........................................................   3071- 9
                         Change in Method of Accounting ...........................................   3071- 9
                         Respondent's Adjustments to Overhead Variances ...........................   3071-13
                         Respondent's Affirmative Claim ...........................................   3071-14
                         Casualty Loss ............................................................   3071-15
                         PIA Depreciation .........................................................   3071-16
                         Purchase Cash Discounts ..................................................   3071-16
                         Rework Labor and Scrap ...................................................   3071-16
                Issue 2: Petitioner's Rebate Programs .............................................   3071-17
                      FINDINGS OF FACT ............................................................   3071-17
                         Rebate History ...........................................................   3071-17
                         TI-59 Rebate Program .....................................................   3071-17
                         The Home Computer Rebate Program .........................................   3071-18
                         The Learning Aids Rebate Program .........................................   3071-18
                         The Speech Synthesizer Rebate Program ....................................   3071-19
                      OPINION .....................................................................   3071-19
                Issue 3: Investment Tax Credit Issue ..............................................   3071-22
                

                      FINDINGS OF FACT ............................................................   3071-22
                         Waster Treatment Facilities ..............................................   3071-22
                         Drywall Partitions .......................................................   3071-23
                         Miscellaneous Structures and Related Equipment ...........................   3072
                         Floors ...................................................................   3073
                         Window Walls .............................................................   3073
                         Ceilings .................................................................   3073- 2
                         Air Conditioning .........................................................   3073- 2
                         Plumbing .................................................................   3073- 2
                         Emergency Doors ..........................................................   3073- 3
                         Fire Protection Systems ..................................................   3073- 3
                         Security Fencing .........................................................   3073- 3
                         Landscaping ..............................................................   3073- 4
                         Electrical Equipment .....................................................   3073- 4
                              Category One ........................................................   3073- 4
                              Category Two ........................................................   3073- 5
                              Category Three ......................................................   3073- 5
                              Category Four .......................................................   3073- 6
                      OPINION .....................................................................   3073- 6
                         Waste Treatment Facilities ...............................................   3073- 8
                         Drywall partitions .......................................................   3073-10
                         Miscellaneous Structures and Related Equipment ...........................   3073-11
                         Floors ...................................................................   3073-13
                         Window Walls .............................................................   3073-14
                         Ceilings .................................................................   3073-15
                         Air Conditioning .........................................................   3073-15
                         Plumbing .................................................................   3073-16
                         Emergency Doors ..........................................................   3073-16
                         Fire Protection Systems ..................................................   3073-16
                         Security Fencing .........................................................   3073-17
                         Landscaping ..............................................................   3073-17
                         Electrical Equipment .....................................................   3073-18
                              Category One ........................................................   3073-19
                              Category Two ........................................................   3073-20
                              Category Three ......................................................   3073-20
                              Category Four .......................................................   3073-20
                

Memorandum Findings of Fact and Opinion

COHEN, Judge:

Respondent determined deficiencies of $34,450,765, $172,714, and $39,777,526 in petitioner's Federal income tax for 1980, 1981, and 1982, respectively. In its petition, petitioner affirmatively asserted that it was entitled to overpayments of $2,530,408, $1,460,668, and $1,645,219 for 1980, 1981, and 1982, respectively. By Amendment to Answer, respondent set forth additional allegations to support respondent's claim that the correct deficiencies in petitioner's Federal income tax for 1980, 1981, and 1982 were $53,465,355, $2,099,681, and $53,221,461, respectively.

The issues discussed in this opinion are: (1) Whether petitioner's treatment of certain indirect costs and overhead variances under the long-term contract method of accounting set forth in section 1.451-3, Income Tax Regs., was proper and whether petitioner is entitled to other related adjustments, (2) whether petitioner's treatment of its rebate programs under section 1.451-4, Income Tax Regs., was proper, and (3) whether certain property used in petitioner's manufacturing operations was "section 38 property" eligible for the investment tax credit. A fourth issue has been separated and disposed of by separate opinion filed this date. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. Because the pretrial stipulation process in this case was not adequate, the Court suggested posttrial stipulation of agreed facts that could be incorporated in our opinion. Based on the evidence, which included 3,696 pages of transcript and over 775 exhibits, the parties filed with the Court 188 pages covering over 410 joint proposed findings of fact with respect to the issues for decision in this opinion. The parties also requested in 79 pages of their briefs that we find an additional 320 facts. It is not reasonable to reproduce here all of the findings requested by the parties. We have therefore endeavored to set forth only those findings that are necessary to explain and to dispose of the issues for decision in this opinion. The other agreed facts are incorporated in our findings by this reference. For convenience, we have set forth below separately our findings of fact and opinion with respect to each issue.

Texas Instruments Incorporated (petitioner) was a publicly held corporation organized under the laws of Delaware with its principal place of business in Dallas, Texas. Petitioner was an accrual method taxpayer that employed other specialized accounting methods in reporting various items of income and expenses for Federal income tax purposes. Petitioner timely filed consolidated Federal income tax returns (Forms 1120) for the taxable years ended December 31, 1980, December 31, 1981, and December 31, 1982.

Issue 1: Long-Term Contract and Overhead Adjustments

Findings of Fact

Background

Petitioner's Equipment Group division (EG) contracted to manufacture equipment for various departments of the United States Government and some...