United States v. New York Telephone Co

• Decision Date: 28 January 1946
• Docket Number: No. 55,55
• Citation: 326 U.S. 638,66 S.Ct. 393,90 L.Ed. 371
• Parties: UNITED STATES et al. v. NEW YORK TELEPHONE CO
• Court: U.S. Supreme Court

326 U.S. 638

66 S.Ct. 393

90 L.Ed. 371

UNITED STATES et al.

v NEW YORK TELEPHONE CO.

No. 55.

Argued Nov. 13, 14, 1945.

Decided Jan. 28, 1946.

The Federal Communications Commission's order for readjustment of telephone company's accounts could not be enjoined on theory that commission's order was premised upon erroneous conclusion that company's original accounting entries were illegal when made, where principal foundation of commission's order was that company was legally subject to requirement of restating its accounts on basis of original cost, notwithstanding commission might have thought, as an alternative ground for its decision, that accounts were illegal when made. Communications Act of 1934, §§ 220(a, c, g), 402(a), 47 U.S.C.A. §§ 220(a, c, g), 402(a); Interstate Commerce Act § 20(5), as amended Sept. 18, 1940, 49 U.S.C.A. § 20(5); Jud.Code §§ 24(28), 208, 209, 211, 28 U.S.C.A. §§ 41(28), 46, 45, 48; 28 U.S.C.A. §§ 43, 44, 47.

Where effect of write-up caused originally by subsidiary telephone company's recording the property purchased from parent company at structural value rather than at parent company's net book cost had never been eradicated, Federal Communications Commission's order requiring subsidiary to make charges to surplus with corresponding credits to other accounts, to conform with commission's uniform system of accounts based upon 'original cost', was not erroneous because portions of property had been retired and written out of plant account at amount at which they were recorded originally and corresponding charges had been made concurrently to depreciation reserve. Communications Act of 1934, §§ 220(a, c, g), 402(a), 47 U.S.C.A. §§ 220(a, c, g), 402(a); Interstate Commerce Act § 20(5), as amended Sept. 18, 1940, 49 U.S.C.A. § 20(5).

Appeal from the District Court of the United States for the Southern District of New York.

Mr. Harry M. Plotkin, of Washington, D.C., for appellants.

Mr. Henry J. Friendly, of New York City, for appellee.

Messrs. Philip Halpern and Frank C. Bowers, both of New York City, for Public Service Commission, amicus curiae.

Mr. Justice RUTLEDGE delivered the opinion of the Court.

This case presents new questions of 'original cost' accounting, which arise from an order of the Federal Com- munications Commission requiring readjustments in appellee's accounts. A detailed statement of the facts is necessary to an understanding of the issues. But the short effect of the controversy is that the Commission has required the appellee, New York Telephone Company, to make charges of some $4,166,000 to surplus, with corresponding credits to other accounts; the ultimate effect being substantially to compel the elimination of so-called write-ups from the company's accounts in order to bring them, to this extent, into conformity with the Commission's Uniform System of Accounts, which is based upon 'original cost.' The attacked entries were made in 1925, 1926, 1927 and 1928, prior to enactment of the Federal Communications Act, upon acquisition by appellee of business and property from its affiliate, American Telephone and Telegraph Company. The case embodies a rather long delayed chapter of the broad controversy presented in American Telephone & Telegraph Co. v. United States, 299 U.S. 232, 57 S.Ct. 170, 81 L.Ed. 142, to be discussed later.

For preliminary purposes it is enough to say that the appellee questions the Commission's power to make the order in issue and a District Court, composed of three judges, has permanently enjoined its execution. 56 F.Supp. 932. From that judgment this appeal has followed.

We turn to the facts before undertaking to state the issues more precisely. Appellee, the New York Telephone Company, is a subsidiary of the American Telephone and Telegraph Company, which owns all its common stock. Since its incorporation in 189 appellee has engaged in the business of furnishing intrastate and interstate telephone service to the public in the states of New York and Connecticut. Prior to 1925, for historical reasons, American also had furnished intrastate toll service between certain points in New York State; but in that year, as part of its plan to withdraw from all such business, Ameri- can transferred its intrastate toll business in New York State to the appellee.

In connection with this transaction occurred the four transfers of property, the accounting for which now concerns us. In November, 1925, September, 1926, and December, 1928, appellee purchased from American certain toll plant consisting of property such as poles, crossarms, guys and anchors, aerial wire and cable, underground cable, loading coils, conduit, and right of way. This property was needed to handle the additional intrastate business which had been transferred to it. Much of the property so acquired was in the form of an additional interest in toll plant which, prior to these transfers, had been jointly owned by American and New York.

The fourth sale took place in 1927. Before that time American had retained ownership of three essential parts, collectively called 'the instruments'—the transmitter, receiver and induction coil—of the telephone stations used by subscribers. American had furnished and maintained these instruments under a contract between it and New York under which New York paid it a specified percentage of its gross revenues. In December, 1927, American sold to New York the instruments then in the service or supplies of New York.

None of these transfers of property changed the physical character of the plant or the service rendered to the public. The sole effects were to shift certain operating costs of American and certain fixed charges and taxes connected with the ownership of the property to New York and to eliminate New York's obligation to make payments to American for use of 'the instruments'; for the rest, as the New York Public Service Commission described the transfer, it was 'a bookkeeping transaction, with no change in ultimate ownership, in location, or in use of the * * * property, but reflecting only a revised business relationship between affiliated corporation.'¹

American and New York agreed that the purchase price of the toll plant was to be an amount equal to its 'structural value.' As defined by the Uniform System of Accounts for Telephone Companies (Instruction 13) of the Interstate Commerce Commission, this was 'the estimated cost of replacement or reproduction less deterioration to the then existing conditions through wear and tear, obsolescence, and inadequacy.' A field inspection and an appraisal of the property were made by engineers, and appellee paid to American a total of $5,973,441.47 for the toll plant. The purchase price of the instruments transferred in 1927 was $6,661,238.91. This was based on the average price charged American by the Western Electric Company, the manufacturer and also a subsidiary of American, during the first nine months of 1927, less a twenty per cent allowance to reflect the then existing condition of the instruments.

The tables set out in the margin show the accounting treatment of these transfers at the time they occurred.² As the tables disclose, the 'profit' to American, that is, the difference between the net book cost to it and the record book cost to New York, was $4,166,510.57. This amount American credited to surplus accounts as profit on the transactions.

This 'profit,' of course, arises from the fact that New York in making its accounting entries ignored the original cost to American and the depreciation which had accrued on the books of American up to the time of transfer, and entered solely the actual price paid by it for the properties. It did not, so to speak, 'fold in' the net book cost to American.

Having set down these properties on its books at the price it paid to the parent corporation for them, New York then applied what it calls the 'group method' of depreciation.³ Under this method special depreciation rates were not applied to the property in question, despite the fact that it had a relatively short remaining life. Instead the current depreciation rates applicable to similar classes of plant were applied as long as the property remained in service. As portions of the property were retired, they were written out of the plant account at the amounts at which they had been recorded therein, that is, at the structural value; and debits of corresponding amounts, less allowance for salvage, were charged concurrently to the depreciation or amortization reserve.

On January 1, 1937, the Uniform System of Accounts of the Federal Communications Commission⁴ for Class A and Class B telephone companies became effective⁵ and applicable to New York. Under this system telephone companies were obliged to establish or reclassify their investment accounts on the basis of 'original cost.'⁶

In reclassifying its accounts as of January 1, 1937, New York estimated the amounts attributable to the surviving toll plant received from American, which it originally had included in its books on the basis of structural value. New York then determined the difference between those estimates and what it estimated was the original cost of such surviving plant to American. The difference was placed in Account 100.4, Telephone Plant Acquisition Adjustment. Account 100.4 includes amounts 'representing the difference between (1) the amount of money actually paid (or the current money value of any consideration other than money exchanged) for telephone plant acquired, plus preliminary expenses incurred in connection with the acquisition; and (2) the original cost of such plant, governmental franchises and similar rights acquired, less the amounts of reserve requirements for depreciation and amortization of the properties acquired.'⁷

In 1938 New York began amortizing this sum by charges and credits to its operating expense Account 614, Amortization of Telephone Plant Acquisition Adjustment, with concurrent...