DocketNumber: Docket Nos. 29054, 32107, 32106
Citation Numbers: 18 T.C. 1128, 1952 U.S. Tax Ct. LEXIS 94
Judges: Murdock
Filed Date: 9/25/1952
Status: Precedential
Modified Date: 1/13/2023
*94
1. Excess Profits -- Abnormal Deductions in Base Period --
2. Excess Profits -- Abnormal Deductions in Base Period --
*1128 The Commissioner determined deficiencies in excess profits tax as follows:
Jan. 1, 1941- | ||||
Dkt. | Aug. 29, 1941 | |||
No. | Petitioner | 1942 | 1943 | |
29054 | Northern States Power Co | $ 219,262.08 | $ 309,440.26 | |
32106 | Minneapolis General Electric Co | $ 5,737.82 |
*1129 The Commissioner also determined that Northern States Power Company (Docket No. 32107) was liable as transferee for the deficiency determined against Minneapolis General Electric Company. The issues for decision are:
(a) Whether interest of $ 419,631.11 for Northern States Power Company, $ 124,666.95 for Minneapolis General Electric Company, and $ 15,913.03 for St. Croix Falls Minnesota Improvement Company, accrued, paid, and deducted in 1938 on additional Federal taxes for the years 1924 through 1933, also paid and accrued in 1938, is (1) abnormal as a class under
(b) Whether the abnormality or excess, if any, was a consequence of a change at any time in the type, manner of operation, *96 size, or condition of the business engaged in by the taxpayers within the meaning of
FINDINGS OF FACT.
Northern States Power Company, hereafter called Northern States, is a Minnesota corporation operating as a public utility in the State of Minnesota and adjacent states. Minneapolis General Electric Company, hereafter called Minneapolis, was a New Jersey corporation operating as a public utility within the State of Minnesota, all of the stock of which was owned by Northern States Power Company. Those two corporations and St. Croix Falls Minnesota Improvement Company, hereafter called St. Croix, were merged on August 29, 1941, and the assets and businesses of all three corporations have been owned and operated since that time by Northern States. The excess profits tax returns of the taxpayers for the taxable years were filed with the collector of internal revenue for the district of Minnesota. The excess profits credits of Northern States for 1942 and 1943 included the base period incomes of the subsidiaries. The books of account of the taxpayers and their returns were filed on an accrual basis of accounting.
The Commissioner of Internal Revenue proposed*97 additional income and declared value excess-profits taxes against Northern States and affiliated corporations prior to 1938 in the total amount of $ 2,027,903.59 for the consolidated return years 1924 through 1933. The taxpayers resisted the imposition of those taxes by filing protests and other documents with the Commissioner and attending conferences with his representatives but agreed with the Commissioner in 1938 to settle their controversy by the payment of additional taxes of $ 1,239,054.99 for the years in controversy, plus interest as provided by law, and the taxpayers executed agreements waiving the restrictions of section 272 (a) and consenting to the assessment and collection of the taxes *1130 due. $ 1,159,609.53, representing the portions of the total due from Northern States, Minneapolis, and St. Croix was paid to the collector in 1938, pursuant to notice and demand from him, and at the same time interest thereon was paid in the following amounts:
Northern States | $ 419,631.11 |
Minneapolis | 124,666.95 |
St. Croix | 15,913.03 |
$ 560,211.09 |
No notice of deficiency was issued in relation to those taxes.
The following table shows the interest paid by the three*98 companies involved herein on past due taxes during the years 1934 through 1938, and during the tax years. The taxes, where not described as a deficiency, are the difference between the estimated installments paid when due and the additional amount shown on a return filed at a later date.
Northern | |||
Kind of tax | States | Minneapolis | St. Croix |
1934: | |||
State income | $ 1,756.19 | $ 205.86 | $ 41.75 |
Federal excise | 4.67 | ||
1935: | |||
State prop | 1,530.53 | ||
Federal income | 3.98 | ||
1936: | |||
State income | 112.72 | ||
Federal income | 6.63 | 4.57 | |
Federal capital stock | 806.33 | 245.83 | 14.75 |
1937: | |||
State income | 79.42 | ||
State income deficiency | 267.10 | 86.70 | |
Federal income | .24 | ||
Federal capital stock | 788.37 | 239.74 | 15.01 |
1938: | |||
State income | 36.38 | 2.64 | |
Federal income | 36.11 | 4.79 | |
Federal income deficiency | 419,631.11 | 124,666.95 | 15,913.03 |
Federal capital stock | 789.04 | 246.58 | 19.73 |
1941: | |||
Federal excise deficiency | 5,731.91 | ||
Federal capital stock deficiency | 197.91 | ||
1942: | |||
State income | 331.42 | ||
State income deficiency 1 | 10,938.21 | ||
Federal income 2 | 25.03 | ||
Federal income deficiency | 1,893.21 | ||
Federal excise deficiency | 1,542.19 | ||
1943: | |||
State income | 285.98 | ||
Federal capital stock deficiency | 274.31 |
A large part, but less than one-half of the operating capital of most public utilities, including the three involved herein, is obtained from long term loans at relatively low interest rates.
Northern States, in addition to the interest shown on past due tax payments in the above table, incurred interest expense in the amount of $ 2,874.950 for 1938 and the two taxable years, and for the years 1934 through 1937 an average of about $ 4,662,000, on its funded debt; *1131 $ 72,903.36 for the taxable years and 1938, and for the years 1934 through 1937 more than $ 74,000 annually, on advances from affiliated companies on open account; and for the years 1934 through 1938 and for the taxable years amounts ranging from a little over $ 13,000 to a little over $ 34,000 on consumers' deposits.
Minneapolis, in addition to the interest shown on past due tax payments in the above table, incurred interest expense of over $ 1,600,000 for 1934 and 1941, and $ 2,524,200 for each of the years 1935 through 1938 to Northern States, and to others almost $ 300,000*100 for 1934, on funded debt; on advances on open account from Northern States, $ 987,365.33 for 1934, $ 40,131.24 for 1935 and 1936, $ 64,662.51 for 1937, $ 200,040.88 for 1938, and $ 126,392.64 for 1941; and on consumers' deposits an average of about $ 11,500 for the years 1934 through 1938, and about $ 6,000 for 1941.
St. Croix, in addition to the interest shown on past due tax payments in the above table, incurred interest expense of $ 70,000 for each of the years 1934 through 1938 on funded debt to Minneapolis; $ 31,336.70 for the years 1934 through 1936, $ 11,605.44 for 1937 and $ 8,442.61 for 1938, on a note to Minneapolis; and from $ 16.98 to $ 33.49 for the years 1934 through 1938 on consumers' deposits.
The amounts deducted on the tax returns as interest of Northern States for the years 1934 through 1938 ranged from a low of about $ 3,500,000 for 1938 to a high of about $ 5,500,000 for 1935, and during the taxable years averaged about $ 3,055,000.
Northern States, in computing its excess profits credit based on income on its excess profits tax return for 1942, excluded interest in the amount of $ 547,379.67 as a deduction for the base period year 1938, that amount being the *101 excess of $ 560,211.09, the interest paid by it and its two affiliates in 1938 on their share of the additional taxes for the years 1924 through 1933, over $ 12,831.42, representing interest on Federal and state income tax deficiencies paid by it in 1942, and in computing its excess profits credit based on income on its excess profits tax return for 1943 it excluded as a deduction the entire $ 560,211.09 paid in 1938.
Minneapolis, in computing its excess profits credit based on income on its return for the period January 1 to August 29, 1941, excluded as a deduction for the base period year 1938, $ 124,666.95, representing the interest paid by it in 1938 on additional taxes for the years 1924 through 1933.
The Commissioner, in determining the deficiencies, refused to disallow the interest deductions for 1938 claimed by the two taxpayers.
All amounts paid by Northern States, Minneapolis, and St. Croix during the years 1934 through 1938 and during the taxable years as interest on taxes paid after the due date thereof is classified separately *1132 from other interest payments of those companies for the purpose of
All facts stipulated by the parties are incorporated herein by this reference.
OPINION.
These petitioners, like most other public utilities, obtained a large part of their working capital by borrowing money for long terms at low rates of interest. These loans are rather permanent investments. It was normal for the petitioners to have large deductions for interest on such borrowings, but in the base year 1938 they had another large interest deduction which was unusual. Tax liabilities for the years 1924 through 1933 were settled and paid, as was interest on those liabilities in the amount of $ 560,211.09. Thus, they paid an extraordinarily large amount of interest of this particular kind in*103 the one base year 1938 and that payment brings them within the spirit of
Is it proper to classify interest on past due tax payments separately from the other interest payments of these taxpayers for the purpose of
The petitioners contend that interest on "tax deficiencies" should be classified separately from all other interest for present purposes. But to classify interest on tax deficiencies separate from interest on other belated tax payments draws too fine a distinction for the purpose of
Deductions attributable to any claim, award, *106 judgment, or decree against the taxpayer, or interest on any of the foregoing, if abnormal for the taxpayer, shall not be allowed, and if normal for the taxpayer, but in excess of 125 per centum of the average amount of such deductions in the four previous taxable years, shall be disallowed in an amount equal to such excess;
The petitioners might gain a greater advantage here from the application of that section than from the holding of the Court that
*1134 No deduction is allowed for Federal income taxes. They are imposed by law. The taxpayers were told that the Bureau thought they owed additional taxes. The subject was discussed between the parties and an agreement, as to the amount of taxes due, was reached. Only thereafter was any "demand" made for additional taxes. There is no necessity or good reason for regarding interest on such taxes as coming within the meaning of
The parties have stipulated that the excess, if any, under