United Telecomms., Inc. v. Comm'r of Internal Revenue
| Decision Date | 10 November 1975 |
| Docket Number | Docket No. 7866-72. |
| Citation | 65 T.C. 278 |
| Parties | UNITED TELECOMMUNICATIONS, INC. (FORMERLY UNITED UTILITIES INCORPORATED), PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
William H. Curtis, George F. Crawford, and Allan W. Stopperan, for the petitioner.
Joe K. Gordon, for the respondent.
Petitioner's subsidiaries constructed their own telephone and power plant properties which qualify as ‘new section 38 property’ as defined by sec. 48(b). Held, for purposes of determining qualified investment pursuant to sec. 46(c)(1)(A) on which the sec. 38 credit against tax is calculated, the basis of the self-constructed new sec. 38 property includes depreciation sustained with respect to a constructing asset on which no sec. 38 credit has been allowed. Held, further, sec. 1.46-3(c)(1), Income Tax Regs., is invalid to the limited extent that it excludes from the basis of the self-constructed new sec. 38 property depreciation sustained with respect to constructing assets on which no sec. 38 credit has been allowed.
Respondent has determined deficiencies in petitioner's income tax in the amounts of $31,448.85 and $119,777.13 for taxable years 1964 and 1965, respectively. Petitioner claims a refund in the amount of $146,595.72 for taxable year 1964. Concessions having been made, the sole issue remaining for our decision is whether, for purposes of computing the petitioner's qualified investment eligible for the section 381 credit against tax, the basis of certain capital assets and improvements qualifying as new section 38 property constructed by petitioner includes depreciation on property used in the construction of those capital assets.
All of the facts have been stipulated and are so found. Those necessary to an understanding of the issue are set out below.
Petitioner United Telecommunications, Inc., formerly United Utilities, Inc. (hereinafter sometimes referred to as United), is a corporation formed under the laws of Kansas and having its principal office at Westwood, Kans., at the time the petition was filed. Petitioner filed consolidated income tax returns for 1964 and 1965 on behalf of itself and its operating subsidiaries on a calendar year, accrual basis with the District Director of Internal Revenue, Wichita, Kans.
Petitioner has a number of operating subsidiaries each of which is incorporated under the laws of the particular State in which it transacts business. Most of petitioner's subsidiaries are telephone companies, and one provides electric, natural gas, and water services. The operations and accounting methods of these subsidiaries are subject to regulation by the States in which their businesses are conducted.
Petitioner's subsidiaries regularly use their own motor vehicles and other equipment in the construction of new telephone plant property and electric, gas, and water plant property, which qualifies as new section 38 property. It has been the practice of these subsidiaries to capitalize the applicable depreciation of such equipment as part of the cost basis of the new property in the construction of which it is used, pursuant to requirements of Federal and State regulatory agencies having jurisdiction over each subsidiary.
The cost basis so calculated has been used for purposes of depreciating the new property and for purposes of computing the investment credit.
During 1964 and 1965, the amount of capitalized depreciation relating to the construction of new section 38 property with a useful life of 8 years or more and included in those properties' investment credit base, by subsidiary, was as follows:
OPINIONThe sole issue presented for our decision is one of first impression. It is (for purposes of computing the qualified investment on which the section 38 credit against tax is calculated): is the petitioner entitled to include in the basis of self-constructed telephone and power plant properties that qualify as new section 38 property the capitalized depreciation of property used in its construction?2
United contends that the term ‘basis,‘ as used in section 46(c)(1)(A)3 with respect to the ‘qualified investment’ upon which section 38 allows a credit against income tax, and as used in section 48(b)4 defining ‘new section 38 property,‘ should be given its general and ordinary meaning. Petitioner rightly states that the economic basis of its constructed properties includes amounts of depreciation on assets used by petitioner to construct those capital assets and improvements. Commissioner v. Idaho Power Co., 418 U.S. 1 (1974). Therefore, United argues, because there is no indication that Congress meant to give ‘basis' as used in the pertinent sections any other definition than its normal meaning, that portion of section 1.46-3(c)(1), Income Tax Regs., emphasized below is invalid as being contrary to the statute:
Sec. 1.46-3(c) Basis or cost. (1) The basis of any new section 38 property shall be determined in accordance with the general rules for determining the basis of property. Thus, the basis of property would generally be its cost * * * and would include all items properly included by the taxpayer in the depreciable basis of the property * * * However, for purposes of determining qualified investment, the basis of new section 38 property constructed, reconstructed, or erected by the taxpayer shall not include any depreciation sustained with respect to any other property used in the construction, reconstruction, or erection of such new section 38 property. (Emphasis supplied.)
Respondent has broad authority to effect the purpose of the statute by promulgating regulations. Commissioner v. South Texas Co., 333 U.S. 496 (1948). Where, as with the investment credit provisions, Congress has specifically given respondent authority to prescribe regulations necessary to carry out the statute's purpose,5 respondent's regulations are entitled to a heavy presumption of validity. Fawcus Machine Co. v. United States, 282 U.S. 375 (1931); Robert E. Catron, 50 T.C. 306, 309 (1968). However, the statute always remains the primary authority and to the extent respondent legislates, thereby exceeding his authority to interpret the statute, his promulgation is void. Manhattan Co. v. Commissioner, 297 U.S. 129 (1936); Boykin v.Commissioner, 260 F.2d 249 (8th Cir. 1958), modifying 29 T.C. 813 (1958); Northern Natural Gas Co. v. O'Malley, 277 F.2d 128 (8th Cir. 1960); Fabian Tebon, Jr., 55 T.C. 410 (1070).
In examining the challenged portion of section 1.46-3(c)(1), Income Tax Regs., quoted above, in the light of sections 46(c)(1)(A), 47 (a)(1), and 48(b), we conclude that the regulation is valid in part and invalid in part.
The Revenue Act of 1962, 76 Stat. 960, added to the Internal Revenue Code of 1954 the investment credit against income tax. Subject to certain limitations, the amount of investment credit allowed by section 38 is generally 7 percent of the taxpayer's ‘qualified investment.’ Sec. 46(a)(1). ‘Qualified investment’ with respect to new section 38 property, the kind here involved, is defined by section 46(c)(1)(A). This section provides that such qualified investment is equal to an applicable percentage of the taxpayer's basis in new section 38 property. The applicable percentage depends upon the estimated useful life of the new section 38 property as set forth in ...
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