Tampa Elec. Co. v. Commissioner

TAMPA ELECTRIC CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Tampa Elec. Co. v. Commissioner Dockets Nos. 13344, 28332, 29593. United States Board of Tax Appeals 12 B.T.A. 1002; 1928 BTA LEXIS 3419; June 29, 1928, Promulgated *3419 1. Amounts contributed to petitioner by prospective patrons towards the cost of constructing extensions of existing power lines to the premises of the contributors, held not to be taxable income. Further held that the amount contributed in 1920 may not be included in invested capital for the year 1921. 2. Petitioner having failed to prove the March 1, 1913, value of a building destroyed by fire in 1922, the respondent's determination of a profit realized from payments made under insurance policies covering the property is sustained. 3. Cost of repairing damages caused by a hurricane in 1921 allowed as a deductible expense in 1922 when the repairs were made. 4. March 1, 1913, value of land determined. George W. Matthews, Esq., for the petitioner. Orris Bennett, Esq., and Hartford Allen, Esq., for the respondent. ARUNDELL *1003 These proceedings, which were consolidated for hearing and decision, arise from the determination of deficiencies of $1,462.09, $8.92, $3,423.11, $2,370.93, and $219.09, in income and excess-profits taxes for the years 1920, 1921, and income tax for the years 1922, 1923, and 1924, respectively. *3420 The issues are: 1. Years 1920, 1922, 1923, and 1924. Whether amounts paid to the petitioner toward the cost of making extensions of its transmission lines to the premises of the contributors constitute taxable income. 2. Year 1921. Whether error was committed in the adjustment of invested capital on account of the deficiency determined for the year 1920. 3. Year 1922. (1) The amount of loss or profit sustained or made because of the loss of a building by fire, compensated for by insurance, and (2) whether respondent erroneously disallowed as a deduction the cost of certain repairs made to property damaged by a storm occurring in 1921. 4. Year 1923. The correct amount of profit realized on the sale of certain real estate. As an alternative to the first issue, respondent asks that in case we hold against him for 1920 the amount received in 1920 be excluded from invested capital for 1921. FINDINGS OF FACT. The petitioner is a Florida corporation with its principal place of business at Tampa. During the taxable years the petitioner was engaged in the business of generating and, with two subsidiaries, distributing electric current for power and*3421 lighting purposes in Tampa, Winter Haven, Plant City, and adjacent territory. It also operated a street railway in the City of Tampa. During the years covered by the first issue a considerable number of persons residing beyond the districts then being served by the companies made application for electric current. Where, upon investigation, it was determined that the business to be obtained by an extension of their transmission lines did not justify the investment, an oral contract was entered into between the company and the applicant by the terms of which the latter was obliged to assume part of the cost of the extension. For extensions made in 1920, 1922, and 1923, the applicant for service *1004 was obliged to make an advance contribution of $10 for each pole necessary to reach his premises. Some time in 1923 the payments required of such applicants were increased to the rate of $30 per pole, with the understanding that for each new patron connected on the extended line during the life of the contract entered into between the parties for the extension, the applicant would receive a refund $30of. The amount refundable was not, however, to exceed the sum contributed. *3422 The "per pole" basis was an arbitrary method adopted as a convenient way of determining the cost of the extension to the applicant. The actual cost in every instance exceeded the amount contributed. All contributions were made in advance of the commencement of the work. Title to the extensions was in the name of the companies at all times. Upon completion of the extensions current was furnished the applicants at the same rates charged other customers, although they could have charged them higher rates. The petitioner depreciated the extended lines the same as it did other similar property owned by it. The amount paid each year by applicants for these extensions, and which the respondent added to the income reported by the petitioner for the three companies in a consolidated return, was: 1920, $5,216; 1922, $3,112.40; 1923, $5,966.49; and 1924, $1,760. The latter amount represents the amount on hand in 1924 after the expiration of the time within which refunds were to be made to contributors for new patrons connected on their line. The sum of $5,219 received in 1920 was included in petitioner's invested capital for the year 1921. For the year 1921, respondent decreased*3423 petitioner's invested capital by $617.78 on account of the deficiency of $1,462.09 for 1920. In 1922 the petitioner owned a bathing pavilion located at Ballast Point Park, near Tampa. The main building was a frame structure, about 65 feet by 100 feet, having a dance hall on the first floor and twelve rooms on the second floor. The adjoining bathhouse was built over the water and contained between 30 and 40 rooms. The building was purchased in 1902 for $5,000. Additions were made in that year at a cost of $5,000, and in 1906 at a cost of $1,500. The building was partially destroyed by storm in 1921 and certain repairs were made. The respondent has treated $6,632.53 of the cost of such repairs as capital expenditures and the petitioner concedes this treatment to be correct. The building was kept in good repair. After the destruction of the building by fire in 1922, the petitioner collected the sum of $20,000 from an insurance company with which the property was insured on account of the loss. The respondent determined a profit realized on the insurance by depreciating the original cost of the building, and additions made thereto, of $11,500 at 4 per cent per annum, leaving*3424 a depreciated cost of $3,000 in 1922. *1005 To this depreciated cost he added the capital expenditure of $6,632.52 and deducted the sum thereof ($9,632.53) from the $20,000 insurance received, thereby finding a profit of $10,367.47. The petitioner expended the sum of $43,384.03 in 1921 and $13,904.96 during the first four months of 1922 in the repair of property damaged by a hurricane in October, 1921. The damage caused by the storm was so great and of such a nature that the petitioner was unable to complete all of the repairs in 1921 and it was not possible for petitioner's engineers to determine, or fairly estimate in 1921, the extent of the damages repaired in 1922. The petitioner was unable to render service for several weeks after the storm and its Bayshore line was out of service for about one month. The repairs made in 1922 were, in part, as follows: Steam plant $1,990.96 Lighting lines 1,276.70 Machinery 579.49 Ballast Point Park pavilion 4,134.29 Passengers cars (mechanical) 1,402.15 Passenger cars (electrical) 2,774.46 Total 12,158.05 In addition the petitioner paid a bill for dredging a certain fill washed into the bay by the*3425 storm. This work was done on the basis of a stipulated price per yard, and the actual cost could not be determined until the dredging was completed in March or April, 1922. The total cost of work done in 1922 as a result of the storm, $61,762.39, was charged to "Plant" and $13,904.96 to expense for repairs. Upon an audit of petitioner's returns the respondent allowed as a deduction in 1921 the cost of repairs made that year, and disallowed as an expense item for 1922 the sum of $13,904.96 expended for repairs made during 1922. Prior to March 1, 1913, the petitioner acquired at a cost of $3,238.50, or $1.50 per acre, 2,159 acres of land located near Tampa. A large portion of the land, not exceeding 75 per cent, was under from 6 inches to 6 feet of water during extremely wet weather. The property was thickly studded with cypress trees. The land was sold in 1923 for $21,590. On March 1, 1913, the fair market price or value was $5 per acre. OPINION. ARUNDELL: The facts in the first assignment of error, that of whether amounts paid to the petitioner in aid of the construction of extensions of its power lines to the premises of the contributors are taxable income, do not*3426 differ in any material respect from those in other similar cases heretofore decided by us, wherein we held contrary *1006 to the contentions raised by the respondent here. Following the principle laid down in those cases, the respondent is reversed. ; ; and . See also . In view of the fact that the elimination of the item of $5,219 from 1920 income will reduce the deficiency for that year, it follows that a recomputation of invested capital for 1921 will need to be made to reflect the prorated correct amount of the 1920 deficiency, if any remains after the adjustment. . The invested capital returned by the petitioner for 1921 and determined by the respondent includes the sum of $5,219 received by the former in 1920 for making power line extensions. A similar situation was before us in the case of *3427 , wherein we held that no part of the cost of the property donated to the petitioner as an inducement to move its business to the city in which the donors resided should be included in invested capital. Following that decision and the principles laid down in the cases cited therein, we are of the opinion that petitioner's invested capital for 1921 should be reduced by the amount of the payments in question. The first assignment of error for the year 1922 concerns the question of whether the petitioner sustained a loss of $232.53, as contended by it, or realized a profit of $10,367.47, as contended by the respondent, as a result of the loss by fire in 1922 of a bathing pavilion. The building was acquired by purchase in 1902. The purchase price, including the cost of improvements made prior to and in 1906, was $11,500. According to the statement accompanying the deficiency letter, the cost of repairs made to the building as a result of damage caused by a storm in 1921 was $13,265.06, of which one-half, or $6,632.53, was charged to depreciation reserve and the other half to profit and loss. After the destruction of the building the petitioner*3428 collected $20,000 from an insurance company under an insurance policy covering the property. The respondent's determination of a profit of $10,367.47 was computed as follows: Total cost of building in 1921 $11,500.00 Less depreciation at 4 per cent per annum 8,500.00 Depreciated value, 1921 $3,000.00 Cost of repairing portion of building damaged by storm in 1921 $13,265.06 Charged to profit and loss 6,632.53 Balance charged to depreciation reserve 6,632.53 Depreciated cost, 1922 9,632.53 Insurance received account of fire in 1922 20,000.00 Profit 10,367.47 *1007 The petitioner's computation of a loss of $232.53 on the transaction was made by adding to a March 1, 1913, value on the building of $20,000, the amount of $6,632.53 for betterments made in 1921 or 1922, and deducting from the total thus reached the figure $6,400 for depreciation from March 1, 1913. The only evidence before us concerning the March 1, 1913, value of the building consists of the depositions of R. M. Prince, a fire insurance agent, Earl G. Moore, vice president of a real estate development company, and Charles T. Friend, a general contractor, who testified*3429 on behalf of the petitioner that the structure had a value at that time of between $20,000 and $25,000. The knowledge these witnesses had of the building was acquired from occasional visits at the place for the amusements it afforded. Upon cross-examination two of the witnesses admitted that they did know the age of the building, and one of the witnesses frankly stated his inability to estimate the life of the property. Their opinions of the March 1, 1913, value of the building were furthermore based upon an estimated reproduction cost, without allowance for depreciation, and did not purport to be an opinion of the fair market value of the property. In , we said, inter alia, that: The value of property on March 1, 1913, is its actual value on that date, and that valuation can not be determined by any sort of theoretical computation, even though that theoretical computation starts with a reproductive value based upon cost of similar property. Value is a real, actual, definite thing, and, in many instances, cost or depreciation, or both, have very little to do with it. Value is what the property is worth. It*3430 is what it would bring in the open market if offered for sale by an owner willing, but not compelled, to sell to a purchaser willing, but not compelled, to buy. Valuations based upon reproduction costs are not of themselves of sufficient evidentiary value to overcome the prima facie presumption that exists in favor of the respondent's determination. ;; and . Having failed to prove the fair market price or value of the building at March 1, 1913, we lack one of the essential factors to determine whether the transaction resulted in a loss or profit, and must sustain the respondent's action. , and . The second assignment of error for the year 1922 pertains to the disallowance as a deduction in that year of the amount of $13,904.96, representing the cost of repairs made in 1922 on account of property damage caused by a hurricane in October, 1921. The respondent disallowed the deduction on the ground that the loss was not sustained*3431 in 1922 and admitted in his answer that the sum of $13,904.96 was expended in that year. The damage caused by the storm was *1008 extensive and some of it of such a nature that it was not possible for the petitioner to complete all of the necessary repair work in 1921. Of the cost of all work done in 1922 at places where damage occurred the petitioner charged $61,762.39 to "Plant" and the balance of $13,905.96 to expense for repairs. The work classified as repairs consisted of rewinding armatures damaged by salt water; dredging a fill washed into the bay, and repairs of a miscellaneous character to a steam plant, lighting lines, machinery, a building and passenger cars. We are convinced from a careful consideration of all the evidence that the work performed may be properly characterized as repairs and as such constitute an allowable deduction in 1922. See , and . The record is not clear as to when the land, the March 1, 1913, value of which is in question, was acquired, but it appears to have been purchased in 1900 or within a year or two thereafter. The*3432 property was covered with a thick stumpage of cypress and a large part of it, but less than 75 per cent, was covered by from 6 inches to 6 feet of water in extremely wet weather. The land was acquired at a price of $1.50 per acre and sold in 1923 for $10 per acre. The petitioner is claiming a valuation of $7.50 per acre on March 1, 1913, for the purpose of computing the profit realized from the sale. The revenue agent's report of the petitioner's tax liability for the years 1922 and 1923 discloses the determination by him of a valuation of $5 per acre. The respondent declined to accept this valuation and computed the profit on the transaction on the basis of cost of $1.50 per acre. From a careful consideration of the depositions of the two witnesses presented by the petitioner to establish the March 1, 1913, value of the land, which constitute the only evidence before us on the question, we have reached the conclusion that the fair market value of the property at that date was $5 per acre. Reviewed by the Board. Judgment will be entered under Rule 50. STERNHAGEN STERNHAGEN, dissenting: As I stated in dissenting from the opinion of the Board in Liberty Light & Power Co.,4 B.T.A. 155,*3433 I am of opinion that the amounts, which in this case appear to have been steadily received in the ordinary course of business from persons in outlying districts requiring service, were within the petitioner's ordinary income as provided by the broad terms of section 233 of the Revenue Acts of 1918, 1921, and 1924. I, therefore, think that the deficiency for 1920 on this account was proper and its effect must be carried into the computation of invested capital for 1921. Furthermore, it seems to me clear that the amounts received for making *1009 extensions were within the corporation's earned surplus and, hence, a proper part of its statutory invested capital. The only possible theory I can think of upon which these amounts could be excluded from earned surplus would be the theory that they were gifts made by the numerous persons who desired service, and this theory seems to me to be so patently unsound as to require immediate rejection. The money was not donated but was paid to the company under ordinary business contracts, and until there is stronger authority than a supposed analogy to the subsidy considered in the Cuba Railroad case, I must continue to regard it as*3434 income which may, under permissible circumstances, become earned surplus. MARQUETTE and MURDOCK concur in the dissent.