El Paso Elec. Co. v. Commissioner

EL PASO ELECTRIC RAILWAY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. EL PASO ELECTRIC CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. El Paso Elec. Co. v. Commissioner Docket Nos. 7048, 7049. United States Board of Tax Appeals 10 B.T.A. 79; 1928 BTA LEXIS 4192; January 21, 1928, Promulgated *4192 Amounts contributed to petitioner in 1920 and 1921 by consumers toward defraying the cost of construction of electric power lines do not constitute taxable income. George W. Mathews, Esq., for the petitioners. Thomas P. Dudley, Jr., Esq., for the respondent. VAN FOSSAN *79 These proceedings, in which the petitioners, both parent and subsidiary, were joined for hearing and decision, involve deficiencies in income taxes only against the subsidiary, El Paso Electric Railway Co., for the calendar years 1920 and 1921, in the respective amounts of $132.02 and $386.27. The deficiencies are alleged to arise from the action of the respondent in holding that certain sums paid to petitioner by consumers to defray part or all of the cost of construction of extensions to petitioners' power lines, constituted taxable income. FINDINGS OF FACT. The petitioner, the El Paso Electric Railway Co., a Texas corporation with principal offices in the City of El Paso, is a subsidiary of the El Paso Electric Co., a New Jersey corporation. Petitioner operates a street railway in the City of El Paso, Tex., and also generates and distributes electric current*4193 for power and lighting purposes in that city and adjoining territory. The City of El Paso covers an area of about 13 square miles, the outlying districts which are thinly settled. Petitioner, in many instances, was not justified in extending its electric transmission lines and furnishing service in the thinly settled areas of the city and adjoining territory unless financial aid was received from the consumer. *80 In such cases, prospective consumers, desiring to have their premises connected with petitioner's power lines and to receive the service of its facilities, entered into separate agreements with petitioner for the construction of electric transmission lines connecting their premises with the existing lines of the petitioner, and for the installation of the equipment essential to such connection. During the years 1920 and 1921 certain consumers made contributions to the petitioner toward the cost of constructing power-line extensions desired by the consumers, which contributions amounted to $695 and $4,437.33, respectively, for those years. These contributions were made by the consumers in each instance under an agreement which provided for the construction*4194 and maintenance by petitioner of power-line extensions to consumer's premises, the consumer defraying the whole or a portion of the cost thereof. After construction the extensions became the property of petitioner. These agreements, numbering approximately 50, were oral, with one exception - that in writing with the El Paso Country Club, in 1921. All contributions under the oral agreements were based on estimated cost of petitioner's power-line extensions as determined by petitioner's engineer, and in most instances, such contributions represented only a portion of the estimated cost of construction. The contribution of the El Paso Country Club was based on the actual cost of petitioner's power-line extension and represented approximately one-third of such actual cost of construction. Consumers were furnished electric current by the petitioner at the same rates as charged its regular consumers for similar service. Petitioner, on its books, charged the costs of the extensions to its property accounts and credited the contributions received from the consumers to reserve and surplus. Upon the audit of petitioner's returns, the Commissioner held that the contributions by*4195 consumers, to the extent of $695 in 1920 and $4,437.33 in 1921, constituted taxable income within those years. OPINION. VAN FOSSAN: The sole issue presented in this appeal is whether contributions in money received in aid of construction of petitioner's power-line extensions constituted taxable income. The facts in this case are similar, in all essential respects, to those which obtained in the . In that case the petitioner entered into contracts with certain individuals for the construction of rural transmission lines in Ohio and Indiana. The contracts provided that the lines should be the property of the power company, and that the individuals should contribute a certain part of the cost of construction. The entire cost of construction *81 was charged to the property account and the amount contributed by the individuals was credited to an account designated "Donations in Aid of Construction." Relying upon the decision of the Supreme Court in the case of *4196 , the Board held that such contributions did not constitute taxable income to the power company. There is no material distinction in that case from the one under consideration. See also . Respondent was in error. Judgment will be entered on 15 days' notice, under Rule 50.