United Telecommunications, Inc. v. C. I. R.
| Decision Date | 29 December 1978 |
| Docket Number | No. 77-1392,77-1392 |
| Citation | 589 F.2d 1383 |
| Parties | 79-1 USTC P 9129 UNITED TELECOMMUNICATIONS, INC. (formerly United Utilities, Incorporated), Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. |
| Court | U.S. Court of Appeals — Tenth Circuit |
William H. Curtis, Kansas City, Mo. (George F. Crawford and Allan W. Stopperan, Kansas City, Mo., on the brief), for appellant.
Stanley S. Shaw, Jr., Tax Div., Dept. of Justice, Washington, D.C. (M. Carr Ferguson, Asst. Atty. Gen., and Gilbert E. Andrews, Washington, D.C., on the brief), for appellee.
Before McWILLIAMS, BARRETT and DOYLE, Circuit Judges.
United Telecommunications, Inc. here seeks review of a decision of the Tax Court ruling against it in a dispute in which the Commissioner acted in accordance with Treas.Reg. § 1.46-3(c)(1). This provides in pertinent part:
. . . 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.
The taxpayer-petitioner's legal position here, as it was before the Tax Court and the Commissioner, is that the above-quoted regulation is invalid, the consequence of which would be that the exclusion by the Commissioner and the Tax Court of capitalized depreciation from taxpayer's investment credit basis was not justified. We disagree with taxpayer's contention. We affirm the Tax Court.
The facts were for the most part stipulated. The taxpayer, a Kansas corporation, has a number of operating subsidiaries incorporated in various states. Consolidated returns were filed by taxpayer in conjunction with the subsidiaries in 1964 and 1965, which are the taxable years here in question.
The subsidiaries use their own equipment to construct new property. Under the applicable state and federal regulatory provisions, they are required for financial accounting to capitalize the depreciation of this construction equipment as part of the cost basis of the newly constructed property. It became clear after the Supreme Court's decision in Commissioner v. Idaho Power Co., 418 U.S. 1, 94 S.Ct. 2757, 41 L.Ed.2d 535 (1974), that in order to compute depreciation for tax purposes, the depreciation on the construction equipment had to be capitalized and recovered as part of the cost of the constructed property.
The taxpayer did capitalize the depreciation on the construction equipment as part of the basis of the constructed property and used that basis in computing the investment tax credit. The taxpayer also claimed investment tax credit on the cost of the construction equipment when it qualified. The result was that the taxpayer frequently claimed a double credit for the same expenditure, once for construction equipment, and also as allocated cost of the constructed property.
The Commissioner disallowed this attempt to obtain a double investment tax credit as being in direct conflict with the regulation quoted above. The taxpayer filed a petition in the Tax Court to contest the deficiencies which were ruled to exist by the Commissioner.
The Tax Court also refused to permit the double credit. United Telecommunications, Inc. v. Commissioner, 65 T.C. 278 (1975). The majority upheld the regulations in question, Treas.Reg. §§ 1.46-3(c)(1) and 1.48-1(b) (4), to the extent that they were applicable in this case and prohibited the taxpayer, when computing the investment tax credit, from increasing the basis of the constructed property by cost allocated from the construction equipment on which the taxpayer had already taken an investment tax credit. Treas.Reg. § 1.46-3(c)(1) was partly invalidated by the majority, but only to the extent that it prevented the cost of the constructed property from including any depreciation attributable to construction equipment when there had been no investment tax credit allowed on the equipment.
Five Tax Court judges concurred in the result. Their view was that the regulation should have been fully upheld. Their view was, also, that the two regulations should have been read together and that the ambiguities should have been construed so as to hold the regulations valid.
The Commissioner had computed deficiencies of $5,963.21 for 1964 and $83,575.92 for 1965. 1 The taxpayer's approach to the deficiencies was to take an additional credit when the construction equipment had not received the maximum amount of credit. Where the construction equipment had a useful life of less than eight years, the taxpayer contended that part of the investment in such equipment failed to qualify for the credit. It then argued that the investment portion which failed to qualify should have been considered as part of the capitalized cost of the constructed property, whereby credit available on the construction of the property would be increased. 2
The taxpayer's argument was rejected by the Tax Court in a supplemental opinion, which upheld the Commissioner's computation. United Telecommunications, Inc. v. Commissioner, 67 T.C. 760 (1977). The regulations were found in this connection to be valid and to prohibit the taxpayer's method of computation.
The claim of the taxpayer here is that the regulation (Treas.Reg. § 1.46-3(c) (1)) is invalid because it excluded capitalized depreciation from the basis of constructed property, which is used to calculate the investment tax credit on the constructed property.
Exclusion of the capitalized depreciation from basis is said to be in conflict with the intention of Congress in using the word "basis" in § 46(c)(1)(A). This provides that "qualified investment" (which amount is used to calculate the investment tax credit) is the aggregate of "the applicable percentage of the basis of each new section 38 property. . . ." The term "basis," it is further argued, is here used in its ordinary and customary sense, which includes capitalized depreciation. A further argument is that the basis of a self-constructed asset, for depreciation purposes, necessarily includes the capitalized depreciation from the construction equipment. Commissioner v. Idaho Power Co., 418 U.S. 1, 94 S.Ct. 2757, 41 L.Ed.2d 535 (1974).
Therefore, the thrust of the taxpayer's argument is allowance of a double investment tax credit on the same cost outlay, since it allows the credit to be taken on the construction equipment and again on the cost of that equipment which has been allocated as capitalized depreciation to the cost of the constructed property. The result is that both the construction equipment and the constructed property are treated as § 38 property and hence eligible for investment tax credit.
The Commissioner's position is that since the double investment tax credit could not be claimed, the regulations should be held valid to the extent that they prohibited such a double credit. Where both construction equipment and construed property qualified for the credit, the Tax Court upheld the regulation and in doing so forced the taxpayer to compute the credit on the construction equipment. On the other hand, the taxpayer was allowed to include capitalized depreciation on construction equipment which is ineligible for the credit as part of the cost of the constructed property used to compute the credit on the constructed property. Therefore, if the construction equipment failed to qualify for the credit, the taxpayer could still realize the credit by capitalizing the cost of the construction equipment in the cost of constructed property which qualified. The majority of the Tax Court invalidated the regulation to the extent that it would deny any credit in this latter situation.
The Commissioner maintains that insofar as the regulations forbid double investment credit, they are reasonable and consistent with the statute and therefore it is proper that they be upheld. The Commissioner further points out that the regulations are consistent with his broad authority to carry out statutory purposes through regulations and his specific authority to promulgate regulations in the investment tax credit area under § 38(b).
Even if a double credit is prohibited, the taxpayer argues, he should be allowed to obtain the maximum credit for such expenditure where the constructed property has a longer useful life than the construction equipment. The Tax Court held that it is not permissible to have an investment tax credit computed in part on the construction equipment and in part on the constructed property, whereby the taxpayer received the benefit of the longer useful life of the constructed property. The Commissioner's objection is that such a computation is not justified by the statute or the regulation.
The stated purpose of the Revenue Act of 1962 was to encourage modernization and expansion of productive facilities, stimulate economic growth, increase job opportunities, and improve the balance of payments. 3 The effect of the investment tax credit was to reduce federal income taxes which Congress hoped would result in an increase in capital investment.
Section 38 allowed a credit for investment in certain depreciable property called "section 38 property." The amount of this was equal to 7% Of the taxpayer's "qualified investment" as that term was defined in § 46(a)(1). As a result of the taxpayer here being a public utility, the credit is limited to 3% By § 46(c)(3), which provides that for public utilities the amount of the qualified investment is 3/7 of the amount determined under § 46(c)(1). By multiplying 3/7 times the 7% Credit generally available, the effect is a 3% Credit for public utilities. The total depreciation allowed was 100% For property with a useful life of eight years or more, 662/3% For property with a useful life of six years or more but less than eight years, and 331/3% For property with a useful life of four years or more but less than six...
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