Public Service Electric & Gas Co. v. United States

. MaddeN, Judge, delivered the opinion of the court: This is a suit for refund of income taxes for the taxable period July 1 to December 31,1948, the amount claimed being $593,724.42. The basis of the plaintiff’s claim is that it was entitled to but was denied a certain credit in computing its surtax net income. It relies upon sections 15 (a) and 26 (h) of the Internal Eevenue Code of 1939. Section 15 (a) says that “corporation surtax net income,” in the case of a public utility, means the net income minus, inter alia, the credit provided in section 26 (h) for dividends paid on its preferred stock. Section 26 (h) (2) (B) defines the characteristics required of stock in order for it to qualify as preferred stock for the purpose of the credit here in question. The plaintiff’s stock is admitetedly qualified except in one respect, which will be discussed hereinafter. The section says that preferred stock, in order to qualify, must have been issued before October 1,1942, or, if issued after that date, it — 406 — must have been issued to refund or replace bonds or debentures or other preferred stock issued prior to that date. In the case of the preferred stock issued after October 1, 1942, but issued to refund or replace prior outstanding securities, the section expressly provides in a parenthesized statement that the stock may qualify if it was issued by the same or another corporation in a transaction, inter alia, subject to Supplement E of the Internal Eevenue Code of 1939. Supplement E deals with transactions carrying into effect the “death sentence” provisions of section 11 (b) of the Public Utility Holding Company Act of 1935. 49 Stat. 820. See sections 371 (f) and 373 (a) of the Internal Eevenue Code of 1939. The plaintiff in 1948 was, and for many years prior thereto had been, a public utility in New Jersey. Until July 1,1948, all of its common stock (except directors’ qualifying shares) and most of its 7% preferred stock were owned by Public Service Corporation of New Jersey, a holding company which was not a public utility. Prior to July 1, 1948, the holding company’s outstanding securities consisted of • a common stock, four different classes of preferred stock, and certain 6% Perpetual Interest-Bearing Certificates. All of its preferred stock had been issued prior to October 1, 1942. Effective July 1, 1948, the holding company was dissolved pursuant to section 11 (e). of the Public Utility Holding Company Act of 1935. One of the elements of the plan of dissolution was the reclassification of the plaintiff’s common stock into 5,503,193 shares of “new common stock” and 6,062,767 shares of “dividend preference stock”. The latter stock had the qualifications of preferred stock, as defined in the statutes here involved. The plaintiff’s dividend preference stock was issued to the holders of all four classes of the holding company’s preferred stock on the basis of an exchange ratio prescribed for each of the four classes of the holding company’s preferred stock. The plaintiff’s preferred stock satisfies the verbal requirements of the pertinent statutes. Though it was issued after October 1,1942, it was issued in a transaction subject to Supplement E, to replace other preferred stock issued before October 1, 1942. The Government says that the statutes — 407 — must not be read so literally. It says that the reason for the enactment, in 1943, of section 26 (h) (2) (B) was that public utility corporations, whose charges to their customers were fixed by public authority, would be hard pressed to pay the proposed high wartime surtax tax rates; that many such corporations had obtained their financing by issuing preferred stock instead of bonds, the interest on which bonds would have been deductible from income by any taxpayer, and that those which had obtained their financing in the former manner should not be subjected to such a harsh discrimination. This dividends paid credit was designed to place public utilities, which were financed largely by issuing preferred stock, on an equality with other corporations, which were financed by bond issues the interest on which was deductible from the corporations’ incomes. The Government says that, since the statute, in general, did not grant the dividends paid deduction in cases of post-1942 issues of preferred stock, it would not have intended that some post-1942 issues, having no antecedents which fell within the reason for the deduction, should qualify. The Government says that since the holding company was not a public utility, it was never entitled to deduct from its income the dividends paid on its preferred stock from the time of the enactment of the original section 26 (h) (2) (B) in 1942 until 1948, hence the allowance of the credit to the plaintiff’s preferred stock issued in 1948 would not be the preservation of a pre-existing status, but the allowance of a wholly new credit. The plaintiff says that Congress did not attempt to foreclose, in all circumstances, the allowance of a credit in cases where the necessary qualifications for the credit were first acquired after October 1,1942. If a corporation which was not in the public utility business in 1942, but which had preferred stock outstanding, entered the public utility business thereafter, its preferred stock would qualify. For •example, if the “death sentence” plan in the instant case had been to dissolve the plaintiff, the operating public utility, and convert the holding company into an operating public utility, its outstanding issues of preferred stock would have qualified for the credit. If a public utility business had — 408 — stock outstanding which for some reason lacked one Or more of the prescribed elements of preferred stock, but, after October 1, 1942, acquired the necessary elements, it would qualify. Treasury Kegulations 111, section 29.26-5 (c) (T. D. 5384, C. B. 1944,148), issued after the enactment of section 26 (h) (2) (B), contained nothing which supports the Government’s present contention, and the Regulations have never been amended in that regard. In Philadelphia Electric Co. v. United States, 127 C. Cls. 297, the reading of the statute for which the Government now contends would have been decisive of the case, but the Government did not there urge such a reading. Not until the issuance of Revenue Ruling 57-45, I. R. B. 1957-5, 29, published February 4, 1957, did the Government take the position which it here seeks to maintain. The statute here in question is reasonably clear on its face. There is no legislative history indicating that Congress intended something different from what its language seenis to say. There is no uniform and consistent overall statutory purpose which is violated by reading the statute as it is written. The Government’s proposed reading seems not to have occurred to it until some fourteen years after the enactment of the statute. In these circumstances we think we would not be justified in concluding that the meaning of the statute is essentially different from that which its words seem to express. The plaintiff is entitled to recover, and judgment will be entered to that effect. The amount of the judgment will be determined in further proceedings pursuant to Rule 38 (c). It is so ordered. Reed, Justice (Bet.), sitting by designation; Whitaker, Judge/ Littleton, Judge; and JoNes, Chief Judge, concur. FINDINGS OF FACT ' The court, having considered the evidence, the stipulation of the parties, and the briefs and arguments of counsel, makes findings of fact as follows: 1. Plaintiff, Public Service Electric and Gas Company, at all times hereinafter mentioned was and is a corporation — 409 — organized and existing under the laws of the State of New Jersey, and having its principal office at Newark, New Jersey; 2. During the entire year 1942 and at all times subsequent thereto plaintiff was, has been and is an operating corporation engaged in the sale of electric energy and gas at rates approved by the Board of Public Utility Commissioners of the State of New Jersey. 3. Within the meaning of Section 2 of the Public Utility Holding Company Act of 1935, and as of the dates of the several orders of the Securities and Exchange Commission and of the District Court of the United States for the District of New Jersey referred to in finding 11: (a) The United Corporation was a registered holding company; (b) Public Service Corporation of New Jersey was a registered holding company and a subsidiary company of The United Corporation; and (c) plaintiff, Public Service Coordinated Transport, South Jersey Gas Company, and County Gas Company, were subsidiary companies of Public Service Corporation of New Jersey. 4. Public Service Corporation of New Jersey was organized on May 6,1903 under the laws of New Jersey, and shortly thereafter acquired by exchange of securities and through long-term leases a major portion of the electric, gas and traction properties furnishing these services throughout the State of New Jersey. From 1903 until 1907, the corporation functioned as an operating company as well as a holding company. In 1907 it began to change its status to that of a holding company only, and in the same year formed Public Service Bailway Company, a wholly-owned subsidiary, to which it transferred its traction properties and traction leases. In 1909 it formed Public Service Gas Company, a wholly-owned subsidiary, to which it transferred its gas properties and gas company leases; and in 1910 it formed Public Service Electric Company, another wholly-owned subsidiary, to which it transferred its electric properties and leases. After 1910 the general character of the business of Public Service Corporation of New Jersey was that of an intrastate holding company, and it continued to invest in and hold stocks and other securities of its subsidiary companies. — 410 — 5. Plaintiff, Public Service Electric and Gas Company, was formed under the laws of the State of New Jersey by agreement of merger and consolidation filed July 25, 1924, between Public Service Electric Company, Public Service Gas Company, and United Electric Company of New Jersey. During the entire year 1942 and at all times subsequent thereto until July 1, 1948, plaintiff’s stock which was issued and outstanding consisted of 199,897 shares of 7% Cumulative Preferred Stock of the par value of $100 per share (except that from 1942 to 1946 there were a minimum of 199,897 and a maximum of 199,982 such shares issued and outstanding), out of the total authorized of 200,000 shares, 300,700 shares of $5.00 Cumulative Preferred Stock without par value but having a stated value of $30,220,000, out of the total authorized of 1,100,000 shares, and 17,885,290 shares of common stock without par value but having a stated value of $146,205,800, out of the total authorized of 20,000,000 shares (except that from January 1, 1942 to November 23, 1943 the stated value was $196,205,800 — the stated value being reduced in November 1943 by $50,000,000 by a charge to Common Stock account and a credit to Capital Surplus account). At all such times plaintiff’s stock was owned in the following manner: (a) 199,841 shares of the 7% Cumulative Preferred Stock were owned by Public Service Corporation of New Jersey, and 197,368 of such shares were pledged under an agreement securing that Corporation’s 6% Perpetual Interest-Bearing Certificates; (b) 700 shares of the $5.00 Cumulative Preferred stock were owned by Public Service Coordinated Transport; (c) all of plaintiff’s outstanding common stock (except directors’ qualifying shares, which never exceeded 17) was owned by Public Service Corporation of New Jersey; and (d) all the rest of plaintiff’s outstanding stock was owned by the public. At all such times the dividends in respect of plaintiff’s 7% and $5.00 preferred stocks were cumulative, limited to the same amount, and payable in preference to the payment of dividends on the common stock. 6. During the entire year 1942 and at all times subsequent thereto until July 1,1948, the stock of Public Service Corporation of New Jersey which was issued and outstanding con — 411 — sisted of 214,493 shares of 8% Cumulative Preferred Stock of the par value of $100 per share, 289,080 shares of 7% Cumulative Preferred Stock of the par value of $100 per share, 598,864 shares of 6% Cumulative Preferred Stock of the par value of $100 per share, 517,512 shares of $5.00 Cumulative Preferred Stock without par value but having a stated value of $49,424,198, and 5,503,193 shares of Common Stock without par value but having a stated value of $111,933,694. At all such times all the shares of each of the classes of preferred stock issued by Public Service Corporation of New Jersey were owned by the public, except 11,552 shares of the 6% Cumulative Preferred Stock, which was owned by plaintiff. At all times the dividends in respect of all such preferred stock were cumulative, limited to the same amount, and payable in preference to the payment of dividends on the common stock. The United Corporation as of June 30, 1948 owned 1,542,318 shares of such common stock of Public Service Corporation of New Jersey, and the rest of such common stock was owned by the public. 7. Effective July 1, 1948, plaintiff’s charter was amended to reclassify its outstanding common stock into 6,062,767 shares of $1.40 Dividend Preference Common Stock without par value (hereinafter called “dividend preference stock”), and 5,503,193 shares of Common Stock without par value (hereinafter called “new common stock”). The dividend preference stock was then, and at all times since has continued to be, stock the dividends in respect of which are cumulative, limited to $1.40 per share per annum, and payable in preference to the payment of dividends on the new common stock. 8. On July 1,1948 all rights of the stockholders of Public Service Corporation of New Jersey as such, except the right to receive stock as hereinafter in this paragraph described or script in lieu of fractional shares thereof, ceased and determined. Each such stockholder (except plaintiff) then became entitled to receive in exchange for his stock in Public Service Corporation of New Jersey the following: (a) for each share of 8% preferred, 4.7 shares of plaintiff’s dividend preference stock; (b) for each share of 7% preferred, 4.15 shares of plaintiff’s dividend preference stock; (c) for each — 412 — share of 6% preferred, 3.7 shares of plaintiff’s dividend preference stock; (d) for each share of $5.00 preferred, 3.25 shares of plaintiff’s dividend preference stock; (e) for each share of common stock, one share of plaintiff’s new common stock plus one-tenth share of the common stock of South Jersey Gas Company theretofore owned by Public Service Corporation of New Jersey). 9. Promptly upon the surrender by the stockholders of Public Service Corporation of New Jersey (other than plaintiff) of their stock certificates on and after July 1, 1948, plaintiff issued and delivered to them in exchange certificates representing shares of its dividend preference stock and its new common stock in the ratios stated in the preceding paragraph. 10. On or about July 1, 1948, Public Service Corporation of New Jersey transferred all its remaining assets to plaintiff and dissolved, plaintiff assuming all the remaining liabilities of Public Service Corporation of New Jersey. 11. All the transactions and things stated in findings 7 to 10 inclusive, were part of a “Final Amended Plan, dated December 29, 1947, for the dissolution of Public Service Corporation of New Jersey, pursuant to Section 11 (e) of the Public Utility Holding Company Act of 1985,” which Plan had the purpose of effectuating the provisions of Section 11 (b) of the Public Utility Holding Company Act of 1935. This Plan was approved by an order of the Securities and Exchange Commission dated December 30, 1947. All the several transactions and things incorporated in such Plan, including those stated in findings 7 to 10 inclusive, were required to be carried out by a further order of the Commission dated February 26, 1948, which was made on the basis of the findings and opinion of the Commission entered the same day. An order of the District Court of the United States for the District of New Jersey was entered March 19,1948 enforcing the aforesaid Plan. A copy of the Plan, the order of the Securities and Exchange Commission dated December 30,1947, the findings, opinion and order of the Commission dated February 26, 1948, and the order of the District Court of the United States for the District of New Jersey dated March 19, 1948, are by reference made a — 413 — part hereof. All of the several transactions and things incorporated in the Plan were actually carried out on or about July 1, 1948. 12. The issuance by plaintiff of its dividend preference stock in exchange for preferred stock of Public Service Corporation of New Jersey, as described in findings 7 to 9 inclusive, was a transaction subject to Supplement R of the Internal Revenue Code of 1939, providing for the nonrecognition of gain or loss upon exchanges and distributions -in obedience to orders of Securities and Exchange Commission. On May 19,1948, the Acting Commissioner of Internal Revenue issued to Public Service Corporation of New Jersey a ruling letter holding to this effect. 13. The stated value of plaintiff’s dividend preference stock which was issued to the holders of the preferred stock of Public Service Corporation of New Jersey as stated in findings 8 and 9, has never exceeded the aggregate of the par and stated values of the preferred stock for which it was exchanged. 14. During the period July 1 to December 31,1948, plaintiff paid dividends in respect of its outstanding dividend preference stock which had been issued to- the holders of the preferred stock of Public Service Corporation of New Jersey as stated in findings 8 and 9. These dividends were paid at the rate of $1.40 per share per annum, and in the aggregate amount of $4,240,888.15. None of such amount was paid with respect to dividends unpaid and accumulated for any prior taxable year. 15. On May 13, 1949, plaintiff filed a corporation income tax return, Form 1120, for the taxable period July 1,1948 to December 31,1948 with the Collector of Internal Revenue at Newark, New Jersey, pursuant to a sixty-day extension of time for filing such return granted by the Commissioner of Internal Revenue on February 8, 1949. Plaintiff reported on such return a federal income tax liability of $4,801,963.91. and paid this amount in installments of $1,199,788.75 on March 15, 1949, $1,201,193.20 on June 15, 1949, and $1,200,490.98 each on September 15, and December 15, 1949. 16. In a report dated March 14, 1952, the revenue agent proposed a deficiency of $29,909.57 in plaintiff’s income tax — 414 — for the period of July 1, 1948 to December 31, 1948. Since plaintiff had on October 5,1951 filed a waiver of restrictions on assessment (Form 870), the Commissioner of Internal Revenue on April 25, 1952 assessed the asserted deficiency against plaintiff, together with interest thereon to November 4,- 1951 of $4,645.81. Plaintiff paid the deficiency of $29,909.57 on October 17,1951 and the interest of $4,645.81 on May 9,1952. 17. On such return, in the computation of surtax net income, plaintiff did not claim any credit under Sections 15 (a) or 26 (h) of the Internal Revenue Code for dividends paid on its dividend preference stock during the taxable period, July 1,1948 to and including December 31,1948, and no such credit has since been allowed to plaintiff for such period in the determination of its tax liability. 18. On May 7, 1952, plaintiff and the Commissioner of Internal Revenue executed on Form 872 a consent, under the provisions of Section 276 (b) of the Internal Revenue Code of 1939, extending to June 30,1953 the period of limitation upon the assessment of tax for the taxable period July 1, 1948 to December 31,1948. 19. On June 29, 1953, plaintiff filed with the District Director of Internal Revenue at Newark, New Jersey, on Form 843, a claim for refund for the taxable period July 1, 1948 to December 31, 1948, in the amount of $593,724.42. The refund claim was grounded upon the assertion by plaintiff that it was entitled in the determination of surtax net income to a credit under. Sections 15 (a) and 26 (h) of the Internal Revenue Code by reason of the dividends which it had paid during the taxable period on its dividend preference stock. 20. The Commissioner of Internal Revenue has not taken final action upon the aforesaid claim for refund referred to in finding 19. Consequently, plaintiff has not been advised of the allowance or disallowance of the refund claim, nor has any part of the surtax paid been refunded to plaintiff. CONCLUSION OE LAW Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter — 415 — of law that plaintiff is entitled to recover, and judgment will be entered to that effect. The amount of recovery will be determined in further proceedings pursuant to Pule 38 (c). In accordance with the opinion of the court and on a memorandum report of the commissioner as to the amount due plaintiff, it was ordered on April 2,1958, that judgment for the plaintiff be entered for $598,370.23, with interest as provided by law.