Wicor Inc. v. U.S.

• Decision Date: 30 September 1999
• Docket Number: No. 97-C-393.,97-C-393.
• Citation: 117 F.Supp.2d 855
• Parties: WICOR INC. and Subsidiaries, Plaintiff, UNITED STATES of America, Defendant.
• Court: U.S. District Court — Eastern District of Wisconsin

117 F.Supp.2d 855

WICOR INC. and Subsidiaries, Plaintiff,

UNITED STATES of America, Defendant.

No. 97-C-393.

United States District Court, E.D. Wisconsin.

September 30, 1999.

Robert Meldman, Margaret Derus, Reinhart, Boerner, Van Deuren, Norris & Rieselbach, Milwaukee, WI, for Plaintiff.

Gerald Leedom, Jeffrey Swyers, United States Department of Justice, Washington, DC, for Defendants.

DECISION AND ORDER

GOODSTEIN, United States Magistrate Judge.

Plaintiff WICOR Incorporated and its subsidiaries brings this action against the United States, seeking to recover federal income tax and interest of which the plaintiff alleges it was erroneously and illegally assessed by the Internal Revenue Service ("IRS"). This case was randomly assigned to this court and the parties have consented to the court's complete jurisdiction. See 28 U.S.C. § 636(c)(1). Jurisdiction is proper based upon the existence of federal questions. See 28 U.S.C. § 1331. Venue is proper in the Eastern District of Wisconsin. See 28 U.S.C. § 1391(b). Currently pending is the defendant's motion for partial summary judgment. The motion seeks a determination on the Section 1341 issue; the unrelated Section 41 issue was the subject of a court trial which was held in April, 1999. The court originally contemplated issuing a decision on both issues together, but due to the volume of evidence and complexity of issues related to the court trial, further consideration of the Section 41 issue is necessary. Nevertheless, the court is ready to render its decision regarding the motion for summary judgment on the Section 1341 issue.

I. BACKGROUND

The following material facts are undisputed for purposes of the defendant's motion for summary judgment on the Section 1341 issue. The Wisconsin Gas Company ("WGC"), a regulated gas utility, is a wholly owned subsidiary of WICOR, Inc. The rates WGC charges customers are set and approved by the Public Service Commission of Wisconsin ("PSCW") based on WICOR's costs of operating, in addition to a reasonable profit. To avoid confusion, the plaintiff will be referred to as WICOR throughout this decision.

WICOR seeks an income tax refund for the tax years 1987 through 1991. WICOR claims it is entitled to compute its federal income tax liability under § 1341 of the Internal Revenue Code with regard to prospective rate adjustments required pursuant to PSCW orders dated December 20, 1984, and December 30, 1986. These orders affected WICOR's deferred state tax account and its deferred federal tax account respectively.

The December 20, 1984 order involves WICOR's collection of state taxes. Prior to 1985, WICOR was allowed to include deferred or future-year state taxes in its cost of service computations, which are used by the PSCW to set rates. Thus, WICOR was able to collect money from its customers in 1979, for example, which could be placed in a fund that would be available to pay its state income tax liability in 1982. WICOR established a "deferred state income tax reserve" for this purpose. In 1984, in Order 6650-GR-19, the PSCW directed WICOR to revise its accounting practice by the use of accelerated depreciation with respect to its computation of its Wisconsin income tax. The effect of this change would result in prospective tax savings to WICOR which, in effect, created an excess balance in its tax deferral reserve. The PSCW further directed that such tax savings should "flow through" to the customers, and that the balance in WICOR's Wisconsin deferred tax fund on January 1, 1985, should be amortized over a 14-year period for this purpose. WICOR was not required to issue refunds to customers from this deferred tax fund, but rather, WICOR reduced the rates charged to customers on future bills.

The December 30, 1986 order involves WICOR's collection of federal taxes. Prior to 1987, rates for WICOR customers also took into consideration WICOR's estimated deferred or future-year federal tax liability. As with its state taxes, WICOR established a reserve account to satisfy its future federal tax liability. As a result of the 1986 Tax Reform Act, the highest corporate federal income tax rate was reduced from 46 percent to 34 percent. Since WICOR had been collecting revenue based on the 46 percent rate, the reduction to 34 percent meant that its deferred federal tax reserve was larger than necessary to pay its deferred federal income taxes. In issuing Order 6650-GR-102, the PSCW required WICOR to charge lower rates in light of the 1986 Tax Reform Act, and also directed WICOR to amortize the excess balance in its deferred reserve over a 12-year period in the form of lower rates on bills. As with the prior order, WICOR was not required to issue a refund..

For tax years 1987 through 1991, WICOR claimed deductions under 26 U.S.C. § 1341, which provides that if:

(1) an item was included in gross income for a prior taxable year (or years) because it appeared that the taxpayer had an unrestricted right to such item;

(2) a deduction is allowable for the taxable year because it was established after the close of such prior taxable year (or years) that the taxpayer did not have an unrestricted right to such item or to a portion of such item; and

(3) the amount of such deduction exceeds $3,000, then the tax imposed by this chapter for the taxable year shall be the lesser of the following:

(4) the tax for the taxable year computed with such deduction; or

(5) an amount equal to—

(A) the tax for the taxable year computed without such deduction, minus

(B) the decrease in tax under this chapter (or the corresponding provisions of prior revenue laws) for the prior taxable year (or years) which would result solely from the exclusion of such item (or portion thereof) from gross income for such prior taxable year (or years).

The IRS regulation interpreting § 1341 provides as follows:

(a) In general.

(1) If, during the taxable year, the taxpayer is entitled under other provisions of chapter 1 of the Internal Revenue Code of 1954 to a deduction of more than $3,000 because of the restoration to another of an item which was included in the taxpayer's gross income for a prior taxable year (or years) under a claim of right, the tax imposed by chapter 1 of the Internal Revenue Code of 1954 for the taxable year shall be the tax provided in paragraph (b) of this section.

(2) For the purpose of this section "income included under a claim of right" means an item included in gross income because it appeared from all the facts available in the year of inclusion that the taxpayer had an unrestricted right to such item, and "restoration to another" means a restoration resulting because it was established after the close of such prior taxable year (or years) that the taxpayer did not have an unrestricted right to such item (or portion thereof).

26 CFR § 1.1341-1.

The IRS refused to apply § 1341 to compute WICOR's tax liability for 1987 through 1991. WICOR then commenced this action seeking a total refund of $509,504.

II. ANALYSIS

A motion for summary judgment will be granted when there are no genuine issues as to material fact and the movant is entitled to judgment as a matter of law. Fed. R.Civ.P. 56(c). As provided under Rule 56(c), only "genuine" issues of "material" fact will defeat an otherwise "proper" motion for summary judgment. See Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). "[M]aterial" facts are those facts which, under the governing substantive law, "might affect the outcome of the suit." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A dispute over such material facts is "genuine" if the evidence is such that a reasonable trier of fact could find in favor of the nonmoving party. Anderson, 477 U.S. at 248, 106 S.Ct. 2505.

The movant bears the burden to establish that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Rule 56(c); see Adickes v. S.H. Kress & Co., 398 U.S. 144, 159, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970); see also Celotex Corp. v. Catrett, 477 U.S. at 323, 106 S.Ct. 2548 (the moving party has the responsibility of informing the court of portions of the record or affidavits that demonstrate the absence of a triable issue). In addition, the moving party may meet its burden to show an absence of a material issue by demonstrating "that there is an absence of evidence to support the nonmoving party's case." Celotex Corp., 477 U.S. at 325, 106 S.Ct. 2548. Any doubt as to the existence of a genuine issue for trial is resolved against the moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. at 255, 106 S.Ct. 2505; Cain v. Lane, 857 F.2d 1139, 1142 (7th Cir. 1988); Spring v. Sheboygan Area School Dist., 865 F.2d 883, 886 (7th Cir.1989). If the moving party meets its burden, the nonmoving party then has the burden to present specific facts showing that there is a genuine issue of material fact. Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).

In this case, the parties concur that there are no genuine issues of material fact and that the task for the court is to determine how § 1341 applies to the undisputed facts. In order to be eligible for a refund under § 1341, WICOR must establish: 1) that an item was included in its gross income for prior taxable years because it appeared that WICOR had an unrestricted right to the income it collected from customers based upon the rates established prior to the 1984 and 1986 PSCW orders; 2) that WICOR is able to deduct the item under another provision in the Internal Revenue Code; and 3) that the amount of such deduction exceeds $3,000.

The government contends that WICOR is not entitled to a refund under § 1341 because WICOR had an actual, not an apparent, unrestricted right to the income from rates collected prior to the 1984 and 1986 PSCW orders. However, even if WICOR did not...