Brief of Appellants — American Telephone & Telegraph Co. v. United States

Supreme Court brief1936

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Opinion below--.-.-.-.------------------------------------ - 1

Pete 6 oo oo once wee ccec cccescwnsesepeccessscncceene 1

Questions presented - - - - - Sakbbinnd ja cecessbutadianhanetens 2

Statute involved-----.----------------------+------------- 4 ‘

Statement--_---.-.----------------------------------------- ee

Argument:

I. The limited grounds upon which idaiinaie may attack

the order of the Commission----------_.-------- 11

II. The original cost provisions are within the Commis-

sion’s statutory authority and they do not infringe

_ rights guaranteed by the due process clause of the

Fifth Amendment-_-.--.------- hp dknedke eens abies 15

1. The original cost provisions_--_-_-._.------- 15

2. The segregation of amounts represented by '

- account 100.4 into a separate balance-sheet

account is not arbitrary_--........_-.---- 21

3. Account 100.4 is not a suspense account------ 26

4. The provision that the Commission may direct

that part of the expenditure made to acquire

the property of another utility be written off

is reasonable and within the Comentanton’s

ebattory atethortty ........ cn ccecawcccccene 32

5. Paragraph (C) of account 100.4 is not invalid

by reason of the fact that it does not itself -

lay down the rules by which the Commis-

sion will act in directing the writing off,

other disposition, or amortization of amounts |

PD Rs htc batinndaesidandencdanwe 40

6. Since the Commission’s order permits amortiza-

tion chargeable as an operating expense of

amounts in account 100.4, it protects any

_ substantive right which appellants may have

. to charge depreciation against amounts in

Se ace cccccana ease ndis ween “ 45

‘ 7. The original cost provisions are not invalid by

reason of the cost of compliance. ________-_- . 68

’ III. The provision that the charges to certain accounts shall

be just and reasonable and that payments in excess

thereof shall be charged as a non-operating expense

is not arbitrary or unreasonable------------- ee 55

105168—36——-1 (I)

Argument—Continued.

IV. The provisions governing classification of physical

_ property are not arbitrary or unreasonable -------

V. If certan provisions of the Commissien’s order should

he held invalid, the separability of the remaining

provisions is an administrative question which this

; See Gee Ge Ge nccesunndacsnsscueauess 68

Condbusiet. ..cccccccccccccccccccccccccccccsccccegeccccce 70

Appendix:

’ Pertinent provisions (other than Sec. 220) of the Communi-

CD le GE Fe eo ccc dateccennncesevsccvbesucece 71

: CITATIONS

Cases: '

Abrams v. Van Schaick, 293 U. 8. 188. _.........-.-.---- 14

Accounting of New York Telephone Co., 188 I. C. C. 83---- 42

Acquisition of Control of Northwestern Long Distance Tele-

phone Ca., 71 1. ©. ©. GBB... cnc ccgpocecccccccce sce 36

Acquisition of Illinois Southern Telephone Co., 1451.C.C. 43. 37, 38

Acquisition of Property by Saratoga & Encampment Valley

ee Se 748, eee 42

Addy Co. v. United States, 264 U.S. 239.....-.-....---- 46

Atlanta, Birmingham & Coast R. R. Co. v. United States,

EP as Uh Ebbeeschocdcstucecsensestcacond nenesane 42, 61

Chesapeake & Ohio Ry. Co. v. Uniteg States, 5 F. Supp. 7-- 42

Columbus Gas & Fuel Co. v. Public Utilities Commission, 292

Ds Oh Bt nasqesepececescoscesenessasesesenonesssénes 57, 67

Dayton Power & Light Co. v. Public Utilities Commission,

Dl Mitt Pi ckdanbiddintihbatnabahinaddithaadanbased 57

Edelman v. Boeing Air Transport, Inc., 289 U. 8. 249____- 14

Intersiate Commerce Commission v. Goodrich Transit Co.,

I Re eat aed eis 11, 58, 64

Interstate Commerce Commission v. Illinois Central R. R. Co.,

Eas a Giitenteindnaseddsncdeanassseoueenesaenes ll

Kansas City Southern Ry. Co. v. United States, 231 U.8.423.. 11,

12, 23, 33, 58, 4

. Knozville vy. Knoxville Water Co., 212 U. 8. 1__.,--------

Lindheimer v. Illinois Bell Telephone Co., 292 U.8.151_ 23, 34, ps

Los Angeles Gas & Electric Corp. v. Railroad Commission,

STEED Tl a ahiasethitipiptinbindiiickeaapaatundaabinminaneanniaents

Matter of New York Edison Co. v. Maltbie, 244 App. Div.

Gey GUE UE Ble Be Mew enccncusscenescosscscda

McCardle v. Indianapolis Water Co., 272 U. 8. 400... ___.-

New York Central Securities Co. v. United States, 287 U. 8S.

Siichindiadatiahtncteavcidanetiantsspeiaabinendesecadimmenibeidninadendhirteihtnéniiiee

Norfolk & Western Ry. Co. v. United States, 287 U. 8. 134... -

12,

13, 21, 42, 57, 61, 64

Pacific Tel. & Tel. Co. v. Seattle, 291 U. 8. 300_.......__-

Cases—Continued.

St. Joseph Stock Yards Co. v. United States, 298 U. 8. @8__-

Smith v. Illinois Bell Tel. Co., 282 U. 8. 133___-._______-

. Smith v. Interstate Commerce Commission, 245 U.S. 33___-

Gegth v. Amea, 160 U. &. 406... 22 ccc ccc ccccccce

Steamship Co. v. Emigration Commissioners, 113 U. S. 33_-

Telephone and Railroad Depreciation Charges, 177 I. C. C.

351 sessed epi dt Shdcatdgcecansls tied ica maketh dhs tae as aah aa edd a

United Retleays Ce Tey Se Gs Ob Be catccocccaaseusa

United States v. Atlanta, ene & Coast R. R. Co., 282

United States v. Clyde ra Co., 36 F. (2d) 691__-....___-

United States v. Cohen Grocery Co., aoe U. &. Gh.......-..

Wilshire Oil Co., Inc. v. Unfted States, 295 U. S. 100_____-

Miscellaneous:

. Uniform System of Accounts for Telephone Companies,

First Issue, effective January 1, 1913______._._______-

Accounting Bulletin No. 11, Interstate Commerce Com-

mission, effective July,1, 1916... .................-.-

H. Rep. No. 1273, 73d Cong., 2d Sess_________- een

Moody’s Public Utilities Manual 1935____..___________-

Moody’s Public Utilities Manual 1936____._______._____-

Poor’s Public Utilities Manual 1929______._________- haw

48, 52

| Inthe Supreme Gourtof the Wnited States

OctosEr TERM, 1936

No. 74

/ APPELLANTS

—" “THe UnItTep States oF AMERICA, FEDERAL COMMU-

NICATIONS COMMISSION, AND NATIONAL ASSOCIA-

TION OF RAILROAD AND UTILITIES COMMISSIONERS

a TELEPHONE AND TELEGRAPH Co. BT AL.,

ON APPEAL FROM THE DISTRICT COURT OF THE UNITED

STATES FOR THE SOUTHERN DISTRICT OF NEW YORK

BRIEF FOR THE UNITED STATES

OPINION BELOW

The opinion of the United States District Court

for the Southern District of New York (R. 561) is

reported in 14 F. Supp. 121.

JURISDICTION

The decree of the District ‘Court. was entered

March 24, 1936. (R. 584:) Petition for appeal

(1)

was filed April 6, 1936, and was allowed‘ the same

day. (R. 586, 594.)

Jurisdiction of this Court is conferred by See.

402 (a) of the Act of June 19, 1934, e. 652, 48 Stat.

1093 (U.S. C., Title 47, See. 402 (a)}, and by the

Act of October 22; 1913, ¢. 32, 38 Stat. 220 (U.S. C.,

Title 28, See. 47), as amended by the Act of Feb-

tuary 13, 1925, c. 229, 43 Stat. 938 (U. S. C., Title

28, Sec. 345).

| QUESTIONS PRESENTED

- The attack upon the “original cost” provisions

of the order of the Federal Communications Com-

mission concerns the accounting prescribed for

property already in public service which is‘ ac-

quired from another public utility, whether a: con-

trolled or independent company, and which the

acquiring company uses or is about to use in tele-

phone service. The order of the Commission pro-

vides that, in the case of such acquisitions, the cost

of the property to the company which first dedi-

eated it to publie service shall be included by the

acquiring company in one set of balance-sheet ac-

counts, and the difference between such “original

cost”’ and the amount paid for the property by the

accounting company (whether in cash or other con-

sideration) shall be credited or debited to another

balance-sheet account, account 100.4. - These and

other related provisions give rise to the following

questions: _ ;

(1) Whether the segregation of amounts repre-

sented by account 100.4 into a separate balance-

sheet account is so arbitrary as to be unauthorized

' by the Act and in violation of the Fifth Amend-

ment. There is also involved the subsidiary ques-

tion whether accpunt 100.4 is a suspense account

or, as its classification indicates, a telephone ip

investment account. %

(2) Whether a provision by virtue of which the

Commission may, when appropriate, direct that

amounts in account. 100.4 be written off is so un-

reasonable as to be unauthorized by the Act and

in violation of the Fifth Amendment.

(3) Whether the provision that amounts in ac-

count 100.4, after they have been subdivided ac-

- eording to their character, shall be. written off,

amortized, or other disposition thereof made, as ~

the Commission shall direct, is unauthorized by the

Act because the provision in question does net it-

self set forth the rules to be applied by the Com-

mission in issuing these directions.

(4) Whether the failure to allow depreciation

as such against amounts in account 100.4, even

though the Commission may, in appropriate cir-

cumstances, permit an equivalent operating-ex- —

pense charge, is so arbitrary as to be unauthor-

ized by the Act and in violation of the Fifth

Amendment. »

‘ (5) Whether the cost and trouble involved in

complying with the original cost provisions is so

burdensome as to constitute a violation of the Fifth

Amendment. |

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Apart from the foregoing questions arising un-

der the original cost provisions, the following fur-

ther questions are presented: ees,

(6) Whether the requirement that the charges

to certain accounts shall be just and reasonable

‘and that payments in excess thereof shall not be

included in operating expenses is so arbitrary as

to be unauthorized sy the Act and in violation of

the Fifth Amendment:

(7) Whether certain classifications of physical

property are so indefinite as to be unauthorized by

the Act and in violation of the Fifth Amendment.

STATUTE INVOLVED

Section 220 of the Act of June 19, 1934, ec. 652,

48 Stat. 1078 (U.S. C., Tit. 47, Sec. 220), known

_ as the Communications Act of 1934, provides in

part as follows:

(a) The Commission may, in its discre-

tion, prescribe the forms of any and all ac-

counts, records, and memoranda to be kept

.by carriers subject to this Act, including the

accounts, records, and memoranda of the

movement of traffic, as well as of the re-

ceipts and expenditures of moneys.

(b) The Commission shall, as soon as

practicable, prescribe for such carriers the

classes of :property for which depreciation

charges may be properly included under op-

erating expenses, and the percentages of de-

preciation-which shall be charged with re-

spect to each of such classes of property,

classifying the carriers as it may deem

_ proper for this purpose. The Commission

-may, when it deems necessary, modify the

. classes and percentages so prescribed. Such

carriers shall not, after the Commission has

prescribed the classes of property for which

depreciation charges may be _ included,

charge to operating expenses any deprecia-

tion charges.on classes of. property other

than those prescribed by the Commission,

or, after the Commission has prescribed per-

centages of depreciation, charge with respect

to any class of property a percentage of de-

preciation other than, that prescribed there-

for by the Commission. No such carrier

shall in any case include in any form under

its operating or other expenses any deprecia-

tion or other charge or expenditure included

elsewhere as a depreciation charge or other-

- wise under its eperating or other expenses.

* * * * *

(d) In ease of failure or refusal on the

part of any such carrier to keep such ac-

counts, records, and memoranda on the

books and in the manner prescribed by the ©

Commission, or to submit such accounts,

records, memoranda, documents, papers,

and gorrespondence as are kept to the in-

spection of the Commission or any of its

authorized agents, such carrier shall forfeit

to the United States the sum of $500 for

each day of the continuance of each such

offense.

(e) Any person who shall willfully make

any false entry in the accounts of any book

105168362 -

anaadiitbaptascie eis on. eee a Ses

PRR Coe Se Fe ee

of accounts or in any record or memoranda

kept by any such carrier, or who shall will-

fully destroy, mutilate, alter, or by any

other means or device falsify any such ac-

count, record, or memoranda, or who shall

willftilly neglect or fail to make full, true,

and correct entries in such accounts, rec-

ords, or memoranda of all facts and trans-

actions appertaining to the business of the

carrier, shall. be deemed guilty of a misde-‘

meanor, and shall be subject, upon convic

tien, to a fine of not less than $1,000 nor

more than $5,000 or imprisonment for a

term of not less than one year nor more

than three years, or both such fine and.

imprisonment * * *,

* * * ; * *

(g) After the Commission has prescribed

the forms and manner of keeping of ac-

counts, records, and memoranda to be kept

by any person as herein provided, it shall

be unlawful for such person to keep any

other accounts, records, or memoranda than

those so prescribed or such as may be ap-

proved by the Commission or to keep the

accounts in any other manner than that pre- -

scribed or approved by the Commission.

Notice of alterations by the Commission in

the required manner or form of keeping ac-

counts shall be given to such persons by the

Commission at least six months before the

same are to take effect.

;

; Other pertinent provisions of the Act are set

; forth in the Appendix, infra, pp. 71-74.

STATEMENT

This is an appeal from a decree of a specially

constituted three-judge District Court dismissing,

except in two minor particulars, a bill to set aside

and enjoin an order of the Federat Communica-

tions Commission issued on June 19, 1935, to be- ©

come effective on January 1, 1936, prescribing a

uniform system of accounts for telephone com-

panies subject to the Communications Act of 1934.

The plaintiffs and intervening plaintiffs below are.

the American Telephone and Telegraph Company

and 36 telephone companies controlled by it, which -

will sometimes be referred to herein as the Bell

companies. (R. 2-3, 244-245, 335: Moody’s 1935

Public Utilities Marmal, pp. 82, 83, 94, 116.) The

additional plaintiffs below are 7 telephone com-

_ panies independent of the Bell system, but con-

trolled by a single holding company, which group

will sometimes be referred to-as the Associated

companies. (R. 237; Moody’s 1936 Public Utili-

ties Manual, pp. 2088-2089). All 44 plaintiffs have

joined in the appeal. The facts and issues are the

same as to both groups of appellants, except that

the ‘‘original cost’’ provisions of the system of

accounts prescribed by the Commission affect a

very much larger proportion of the property of the

Associated companies than of the Bell companies.

The present proceeding was instituted pursuant

to Section 402 (a), infra, p. 73, of the Communica-

tions. Act of 1934 (hereinafter sometimes referred

Pye en

“4

‘4

;

to as the Communieations Act). This section pro-

vides that the statutory provisions relating to the

enforcement or setting aside of orders of the Inter-

state Commerce Commission shall apply to suits to

set aside orders of the Communications Commis-

sion (with exceptions immaterial here). Appellee,

National Association of Railroad and Utilities

Commissioners, representing the regulatory com-

missions of 46 states, which had taken part in the

proceedings before the Communications Commis-

sion leading to the order under attack here, was

allowed by the District Court to intervene as a

party defendant in support of the Commission’s

order. (R. 266, 268, 271.) : |

Prior to the enactment of the Communications

Act, the accounts of telephone companies engaged

as common carriers in interstate communication

were subject to regulation by the Interstate Com-

merce Commission under Section 9 (5) of the

Interstate Commerce Act.’ Section 220 of the

Communications Act, which closely parallels the

language of various subsections of Section 20 of

the Interstate Commerce Act, conferred upon the

Communications Commission authority to pre-

sczibe the accounts to be kept by. such telephone

carriers. The Communications Act repealed the

: This authority was first vested in the Interstate Com-

merce Commission when the Mann-Elkins Act of June 18,

1910 (36 Stat. 544), extended the definition of “common car-

rier”, as used in the Interstate Commerce Act, to include

telephone companies.

Mt ee eae kn een cash Raden ea aticent cette

9 -

provisions of the Interstate Commerce’ Act relat:

ing to telephone companies, but. provided that all

outstanding orders of the Interstate Commerce

Commission : issued under these repealed pro-

visions. should continue in effect until modified or

superseded by the Communications Commission

(Sees. 602 (b), 604 (a)).

The Interstate Commerce Commission first exer-

cised authority over telephone company accounts

in December 1912, when it prescribed a uniform

system of accounts effective January 1,1913. (R.

19.) These accounting rules remained in effect,

substantially without change, during the next 20

years. (Ib.) They were superseded by a revised -

system of accounts (sometimes referred to herein

as the 1933 System of Accounts) promulgated by

the Interstate Commerce Commission in November _

1932 and effective, except as to very small com-

panies, January 1, 1933. The ‘order of the

Commission prescribing these accounts and the

accounts themselves are set forth in full in

the record. (R. 345-456.) Certain objections to

the accounts were filed by a number of State regu-

latory commissions. (R. 15-16.) The Interstate :

Commerce. Commission, after the enactment of the !

Communications Act but before its effective date .

(Sec. 607), issued a report on these objections but

no order. “(R. 15-84.) - .

The Communications Commission authorized the

filing of objections to-the foregoing report of the

= ay

Interstate Commerce Commission; held a hearing

on these objections ; adopted a ‘‘draft of a Uniform

System of Accounts’? which it submitted to all

_ interested parties; entertained exceptions to these

accounting rules, which exceptions. were considered

at a conference with representatives ef the tele-

phone companies and of the state commissions;

and on June 19, 1935, issued the order prescribing

the system of accounts under attack in this ease.

(R. 91-92.) These accounts (hereinafter some-

times referred to as the 1936 System of Accounts)

and the order putting them in effect are set forth in

full in the record. (R. 85-220.)°

The parties stipulated to submit the case for final

. decree upon the pleadings and the affidavits filed

in support of and in opposition to plaintiffs’ appli- -

cation for an interlocutory injunction. (R. 552-

_ 593, 559.) Five affidavits were so filed by the Bell

companies (R. 307, 317, 324, 331, 334), one by the

Associated companies (R. 457), six by the Com-

munications Commission (R. 468, 484, 500, 523, 531,

544), and affiants for the Bell companies submitted

rebuttal affidavits reaffirming certain of their orig-

inal conclusions ad statements (R. 553-557). All

of the affidavits deal with the interpretation. and -

. effect of the 1936 System of Accounts.

The District Court unanimously held that the

accounting rules prescribed by the Communica-

tions Commission are not, with two minor excep-

tions, arbitrary, unreasonable, or such as to de-

prive appellants of rights guaranteed by the Fifth

Amendment. ad 561-572.) ‘The court filed, pur-

suant to Equity Rule 70%, findings of fact (R.

573-578, 583-584) and conclusions of law (R. 578-

583). The accounting provisions which appellants

challenge have been stayed pending the appeal-to

this Court. |

ARGUMENT

THE LIMITED GROUNDS UPON WHICH APPELLANTS MAY

ATTACK THE ORDER OF THE COMMISSION

This Court has said that in a suit to set aside an

order of the Interstate Commerce Commission the

only questions which are open for review are

- whether there have been ‘‘violations of the Consti-

tution, or of the power conferred by statute, or an

exercise of power so arbitrary as virtually to

transcend the authority conferred.’’ Kansas City

Southern Ry. Co. v. United States, 231 U. S. 423,

440. In such a proceeding the court may not

‘‘under the guise of exerting judicial power, usurp

merely administrative functions by setting aside a

lawful. administrative order upon our conception

as to whether the administrative power has been

wisely exercised.’’ Interstate Commerce Commis-

sion v. Illinois Central R. R. Co., 215 U. S. 452, 470.

When the Commission is exercising delegated

legislative power to preStribe the accounts to be

kept by common carriers (Interstate Commerce

Commission v. Goodrich Transit Co.; 224 U. S.

194), there is a wide range for the exercise of ad-

ministrative judgment and discretion with which

the courts will not interfere by substituting their .

judgment for that of the administrative body. An

attack upon an order prescribing accounts ‘‘is, and

must be, rested at bottom upon the contention that

the regulations embodied in it are so entirely at

odds with fundamental principles of correct ac-

counting as intrinsically to manifest an abuse of. . }

power.’’. Kansas City Southern Ry. Co. v. United

States, supra, p. 444. The question presented is .

whether the regulations of the Commission ‘‘do

violence to’’ generally accepted principles of ac-

counting, that is, whether they are ‘‘so clearly con-

trary to these and other applicable principles that

they should be set aside as being in excess of the

powers conferred by Congress upon the Commis-

sion.”’ Jb.,p.447. Itis not enough that the court

is of the opinion that the accounting rule ‘‘ought

to be’’ other than that prescribed; this is not ‘‘a

: sufficient ground to declare that the Commission

had abused its power.’’ Jb., p. 456. |

4 These principles have been recently reaffirmed |

and restated. In Norfolk & Western Ry. Co. v.

United States, 287 U. S. 134, 141, involving the

validity of an accounting order of the Interstate |

Commerce Commission, the Court said: _

Within broad limits that body’s detetmina-

tion is necessarily beyond revision and cor-

rection by the courts. * * * Whether the

Commission should make special classifica-

tions to fit exceptional cases lies within the

_—_

discretion conferred, and courts ought not to

be called upon to interfere with or correct

alleged errors With respect to accounting

practice. If we were in disagreement with

the Commission as to the wisdom and pro-

priety of the order, we are without power to

usurp its discretion and substitute our own.

Since, as this Court said in the Norfolk & W est-

ern case (p. 143), the test of validity is whether the

order is so ‘‘arbitrary and outrageous’”’ as to

‘amount to an abuse of power’’, those vested with

administrative authority to prescribe accounting

rules may determine controverted questions in more

than one way. In the present case the Interstate

Commerce Commission expressed an adverse opin-

ion upon certain accounting rules which the Com-

munications Commission subsequently adopted, but

it does not follow that the decision of the latter body

is therefore ‘‘arbitrary and outrageous’’. That it

is not, but is, on the contrary, well within the zone of

reasonableness and therefore within the scope of ad-

ministrative discretion would seem a fair inference

from the'fact that the order of the Communications

Commission is actively supported (R. 562; Fg. II,

R. 574) by an association representing some 46

state public utility regulatory bodies.’

2 The order of the Michigan Public Utilities Commission

. of December 3, 1935, referred to in the brief of additional

appellants (p. 8), did not “reject” the 1936 System of Ac-

counts. The order was entered after the filing of the present

suit, Lie sal a stay order and temporary injunction

1051686-36——3

Appellants contend that the order of the Com-

mission is so arbitrary that it amounts to a denial

of due process. This suit was brought before the

order had gone into effect. In large part the arbi-

trary characteristics of the order asserted by ap-

pellants rest upon disputed interpretations of the

meaning of the order. If the Commission, in ad-

ministering the order, adopts the meaning and in-

terpretation’ which its witnesses place upon the

order, most of the constitutional questions raised

by appellants will never require adjudication.

Unless or until the Commission adopts or threatens

to adopt a construction of its order which might

render it invalid, no constitutional right of appel-

lants is infringed. ‘“‘In the circumstances, no case,

is presented, either by pleadings or proof, calling

on a fedeal court of equity to rule upon the cor-

rectness of some other construction which may

never be adopted.”’ Edelman v. Boeing Air Trans-

port, Inc., 289 U. S. 249, 253. This Court has

rigidly adhered to the rule “‘never to anticipate a

question of constitutional law in advance of the

necessity of deciding it.’’ Steamship Co. v. Im-

migration Commissioners, 113 U. S. 33, 39. See

Abrams v. Van Schaick, 293 U. 8. 188; Wilshire

Oil Co., Inc. v. United States, 295 U. S. 100.

against the 1936 System of Accounts. The order of the

Michigan Commission merely revoked a prior order under

which this System would automatically have become the

accounting rules of the Michigan Commission.

THE ORIGINAL COST PROVISIONS ARE WITHIN THE COM-

MISSION’S STATUTORY AUTHORITY AND THEY DO NOT

INFRINGE RIGHTS GUARANTEED BY THE DUE PROCESS

CLAUSE OF THE-FIFTH AMENDMENT :

¢ 1. THE ORIGINAL COST PROVISIONS

The meaning, effect and purpose of the original |

cost provisions of the Commission’s order will

appear more clearly if the comparable provisions

of the 1933 System of Accounts are first set forth.

In this system a’ single balance-sheet account, 100,

covers telephone plant. . Account 109 is the total

of the primary telephone plant.accounts, 201 to

280, inclusive, and it includes both property 1 in tele-

phone service and that held under a. definite plan

for such service. (R. 378.) The primary tele-

phone plant accounts include such intangibles as

those represented by account 201, ‘‘Organization’”’,

and account 202, ‘‘Franchises”’; they also include

account 280, ‘‘Construction work in progress’’, and

account 278, ‘‘Untdistributed cost. of property”’.

(R. 393.) When property ‘‘in use in telephone

service”’ is purchased from another public utility,

the accounting is as follows: (1) the appropriate

primary plant accounts are charged on the basis

of land at ‘‘estimated current value’’, tangible

petsonalty at “‘eurrent cost new’’, franchises at

“original cost’’, and construction work i in progress

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at ‘“eost’’;* (2) depreciation and amortization

reserves are credited with thé estimated reserve .

requirements applicable to the plant; and the dif-

ference between the net of (1) and (2), on the one

hand, and, on the other hand, the cost of the prop-

erty to the accounting company is credited or

debited to account 278. (R. 365-366:) To state

the matter more simply, what goes into account 278

is the difference between the present value of the

property acquired (franchises being valued at

original cost) and the amount paid to acquire the

property.

Since account 100 is the sum of the primary tele-

_ phone plant accounts, one of which is account 278,

under this system the full amotint paid another

utility for telephone property is included in the

balance-sheet account covering telephone plant,

irrespective of whether it is proper under sound

accounting principles to capitalize the. entire ex-

penditure. Moreover, amounts entered in account

278 may continue there indefinitely whether such

asset value as this investment may have originally

: represented continues to exist or not. This is so

} because amounts in account 278 are not subject to

! depreciation charges and because the accounting ~

company is not required to amortize balances in

In lieu of these charges, the accounting company may,

with the approval of the Commission, charge to its primary

plant accounts the amounts catried on the books of the

vendor with respect to the property purchased. (R. 366.)

278 although it is given the option of doing so

(account 413, R. 414) by debiting surplus.

Under this system the balance-sheet account

representing telephone plant may be inflated by

transfers between controlled companies, in which

transactions price is a matter of indifference since

they involve a mere shift of assets from the parent

company’s left hand pocket to its right hand

pocket. (R. 536.) Furthermore, such transfers

may be made the medium for writing up the pri-

mary telephone plant accounts, on which deprecia-

tion charges are based, to current cost new. The

extent of such write-ups rests largely in the dis-

cretion of the accounting company. It is well

known that appraisals of reproduction cost vary

widely and appraisals made simply for the purpose

of entering transactions on the books of account

are not subjected to the check .of adversary pro-

ceedings.’ The fact that write-ups of this char-

acter are permitted destroys the trustworthiness

of the accounts from the standpoint of investors

and makes them unreliable for use in arriving at

original cost of construction, a recognized relevant

factor, to be considered along with other relevant

factors, in determining value in rate litigation.

Smyth v. Ames, 169 U. 8. 466, 547; McCardle v.

*“Many so-called ‘appraisals’ are little more than esti-

mates and the values obtained by them have no substantial

basis.” Montgomery, Auditing Theory and Practice, 5th

Ed., p. 278.

Aa the

ahd

Indianapolis Water Co., 272 U. S. 400, 410-411;

Los Anaeles Gas & Electric Corp. vy. Railroad Com-

‘mission, 289 U.S. 287, 306."

The nature of the telephone business is such that

it is, and for efficient operation must be, a terri-

torial monopoly; in fact it is substantially a na-

tion-wide monopoly. Accordingly, such telephone

property as is acquired from another utility is

usually acquired from a controlled or affiliated.com-

pany.” The opportunities for possible abuse per-

mitted by. the 1933 System of Accounts in connec-

tion with such acquisitions is therefore a matter of

primary importance.

Another defect in the 1933 System of Accounts

is that there is no uniformity in the basis on which

property is carried in the primary telephone plant

‘The phrase which this Court has used is “original cost

_ of construction”. In the case of property dedicated to the

public service, cost at the time of first dedication the Com-

mission's definition of original cost) is the practical equiv-

alent of original cost of construction. In the Los Angeles

case cited above, where there had been no change in owner-

ship, original: cost of construction and cost to the owner

were the same, and both forms of expression were used.

Obviously, the amount which a subsequent owner pays to

acquire property is not the same as original cost of con-

struction.

*Of the total property acquired from other utilities by

the Bell Companies sinee 1915, two-thirds has been acquired

from companies, all or substantially all the stock of which

was owned by Bell Companies. (R. 336.) The remaining

one-third was acquired “partly from affiliated and partly

from independent companies”. (Zd.)

accounts and therefore no uniformity in the basis

on which depreciation charges are computed.

Property constructed by the accounting company

or purchased from non-utilities is carried at cost.

Property purchased from another utility since

January 1, 1933, is carried either at reproduction

cost new or at the amount shown on the books of the

predecessor company. ‘‘Going or completed

plant’? purchased before January 1, 1933, is car-

ried on varying bases, as indicated below.’

The 1936 System of Accounts splits up the bal-

ance-sheet account representing telephone plant

into four balance-sheet accounts. Account 100.1 is

limited to property-‘‘used in telephone service’’.

Account 100.2, ‘‘Telephone plant under construc-

tion’’, represents a transfer of account 280 (1933

System) from the primary telephone plant ac-

counts to a balance-sheet account. Account 100.3,

‘‘Property held for future telephone use’’, is a

segregation into a separate baiance-sheet account

of telephone property not in use but held for such

7Instruction 13 (p. 33) of the.Uniform System of Ac-

counts for Telephone Companies, First Issue, effective

January 1, 1913, provided that when a-going or completed

plant was purchased, the constituent elements should be

charged to the appropriate plant accounts at structural

value (estimated cost of reproduction less depreciation) if

the consideration given exceeded total structyral value; and

that if the consideration did not exceed such value, it should

be distributed through the accounts ‘in proportion to the

structural value of the constituent elements appropriate to

the respective accounts.

ste — e x spade ahs ta Setanta,

< penne se ne Sieh det

X ade beret

Pa eee el eininatl

use. (R. 123.)- Property is to be carried in these

three accounts, as well as in the primary telephone

plant accounts, at ‘original cost”’, which is defined

as the-cost of the property ‘‘at the time when it was

first dedicated to the public use, whether by the

accounting company or by a predecessor public

utility’. (R. 101, 122-123, 144-156.) Such origi-

nal cost and cost to the accounting company is the

Same except when property is acquired from an-

other utility. In the case of such acquisitions the

difference between cost to the accounting company

and original cost (less depreciation applicable at

date of acquisition) is credited or debited to bal-

ance-sheet account 100.4, ‘‘Telephone plant acqui-

sition adjustment’’. (R. 123.)

As the District Court said (R. 567), account

100.4 “‘performs a function similar to’’ account

278. There is entered in each account the differ-

ence between the amount paid to acquire property

from another utility and the amount which under

the accounting rules is chargeable to primary tele-

phone plant accounts. But the 1936 System of Ac-

counts, in line with the other changes adopted for

the purpose of rendering the balance-sheet state-

ment more informative, makes the account a sepa-

rate balance-sheet item instead of leaving it buried

among the primary telephone plant accounts.

Paragraph (B) of 100.4 provides that the ac-

count shall be subdivided according to the charac-

ter of the amounts contained therein and paragraph

seal ee

ae ¥

The amounts recorded in this account

with respect to each property acquisition

shall be disposed of, written off, or provision

shall be made for the amortization thereof

in such manner as this Commission shall

direct.

2, THE SEGREGATION OF AMOUNTS REPRESENTED BY ACCOUNT

100.4°- INTO A SEPERATE BALANCE-SHEET ACCOUNT IS NOT

ARBITRARY

Appellants assert (Br., p. 22) that the Commis-

sion’s order requires accounts to be kept on a basis

which will not show the accounting company’s own

actual costs, but the costs of some prior owner.

We submit that: the order does not have this effect.

What it does is to require that, in the case of prop-

erty already in public service acquired from

another utility, the original cost of such property

shall be shown in one set of balance-sheet accounts

(100.1, 100.2, 100.3) and the difference between

such origins! cost and cost to the accounting com-

pany in another balance-sheet account (100.4).

A public utility does not have a constitutional

right to any particular classification of its property

investment. Norfolk & Western Ry. Co. v. United

States, 287 U.S. 1384, 143. Appellants therefore

have the burden of establishing that it is plainly

unreasonable to segregate in a separate balance-

sheet account the portion of their property invest-

ment represented by account 100.4. Appellants

not only fail to sustain this burden, but the segre-

105168—-36—-4

Oe eeee

oe ey

gation in question can be shown to be reasonable

upon a number ef grounds,

Purchases of going telephone- property from

another utility are, with rare exceptjons, not pur-

chases of individual articles, such as a coil of wire,

a certain number of telephone poles, or a particular

underground cable, but, they are purchases of

another company’s entire assets or of its entire

assets in a given territory. The amount paid in

such acquisitions is always subject to the possibility

of distortion if, as is usually the case, the property

is acquired from a controlled or affiliated company,

and in the case of acquisitions from independent

companies there are so many extraneous factors

affecting price (infra, pp. 34-38) that the amount

paid is an unreliable index of the. investment in

telephone plant as such. To segregate in certain

accounts the original cost furnishes investors with

precise and accurate data as to the basis upon

which the amount of the investment represented by

these accounts is computed. To set forth sepa-

rately on the balance sheet an account which repre-

sents, the difference between the cost to the owner

and original cost, where there is such a difference,

likewise furnishes inf¥estors and other interested

parties with more complete information than if

this difference were concealed in a single balance-

sheet account covering telephone plant. From the

standpoint of correct accounting, account 100.4 ap-

propriately belongs among the balance-sheet ac-

counts. (R. 473.)

The segregation in question, in addition to being

enlightening to investors, will also provide ‘ac-

curate, current data as to one of the*factors ordi-

narily considered in a rate case. (Supra, pp. 17-

18.) Certainly any accounting rule which tends to

diminish the delays attendant upon rate litigation

is eminently reasonable.” The classification there-

fore aids the Commission in performing more ex-_

peditiouSly one of the most important duties

imposed upon it by the Act, the determination and

prescription under Section 205 (a), infra, p. 71, of

just and reasonable charges for the services ren-

dered by carriers subject to the Act. The segrega-

tion is also in aid of the authority given to the Com-

mission by Section 213, infra, p. 72, to value the

property of carriers subject to the Act, paragraph

rier to file a statement showing ‘‘the original cost at

the time of dedication to the public use” of the

earrier’s property.

‘Even if the reasonableness of the segregation

were far less clear than it is, it would not transcend

either the Commission’s statutory authority or con-

stituti@ial limits. In Kansas City Southern Ry.

Co. v. United States, 231 U. 8. 423, 456, this Court,

® The rate litigation before this ‘Court in Lindheimer v.

Illinois Bell Telephone Co., 292 U. S. 151, extended over a

period of more than ten years and involved the collection

from customers of many millions of dollars of excess

charges which ultimately had to be refunded to them. See

also St. Joseph Stock Yards Co. v. United States, 298 U.S.

* 38, 84, 88-92.

{

oh Pie -s

in sustaining an accounting order of the Interstate

Commerce Commission, said:

But, did we agree with appellant that the

abandonments ought to be charged to surplus

or to profit and loss, rather than to operat-

ing expenses, we still should not deem this a

sufficient ground to declare that the Com-

mission had abused its power.

Appellants, apparently recognizing the weakness

of an attack upon the original cost provisions based

simply upon the classification of investments which

they enforce, make the further contention that,

once the Commission has exercised the power re-

served in paragraph (C) of account 100.4 to write

off or to amortize amounts therein, the balance-

sheet accounts will not show the company’s total

investment in telephone plant. In so far as the

Commission directs amortization, its action is

merely an application of the familiar accounting

principle that there should be accruing ‘charges to

income or surplus to create a reserve sufficient to

offset the property loss which ensues when prop-

erty, Whether tangible or intangible, outlives its

usefulness and is no longer an asset of continuing

value. With reference to possible write-offs di-

rected by the Commission, it must be assumed in

this preliminary attack upon the order before it

has gone into operation, that write-offs will be di-

rected only in those instances where the expendi-

ture in question should not, under sound account-

ing principles, be capitalized as an asset. That

nn 7

there are expenditures of this character is shown

later. (Infra, pp. 32-38.) The writing off of such

amounts has the effect of showing the company’s

actual investment in telephone plant, by eliminat-

ing what might otherwise be improperly included

therein. Thus the Commission’s order, so far

from producing, as appellants contend, a distorted

or untrue pfeture of the company’s.plant invest-

ment, in fact operates to prevent a distorted or

misleading picture. -

The Director of Research and Valuation for the

New York State Public Service Commission ex-

pressed the opinion that if the information pro-

posed to be shown by accounts 100.1, 100.2, 100.3

and 100.4 had been available to investors in public

utility securities, the inflation in the prices of these

sécurities during the 1920-1929 period, ‘‘based in

many cases upon the publication of balance sheets

showing investments in operating property far in

excess of the original cost of such investments,

would have been materially less than actually oe-

curred, with resulting material decrease in the

losses sustained by investors in the period since

1929.’” (R.535.) .

Under any accounting system the balances in the

plant accounts at any given time are likely to eor-

respond only approximately to the amount ex-

pended for plant. For example, under the 1933

System of Accounts, after exercise of the option to

‘amortize, by debits to surplus, account 278, ‘‘Un-

distributed cost of property’’, and account 201,

* ks ot he Nees eS

ae ee ee eee Pere

ved Otetle Ww nw ~ roe

“‘Organization”’, the balances in the plant accounts

will not show the amount actually expended for

plaat.

- 3. ACCOUNT 100.4 IS NOT A SUSPENSE ACCOUNT

In the 1936 System of Accounts the balance-sheet

accounts on the asset side are grouped under four

headings: ‘‘Investments,’’- ‘‘Current Assets,”’’

“Other Assets,’’ ‘Prepaid Accounts and Deferred

Charges.”” (R. 121.) The grouping in the 1933

System of Accounts was similar. (R. 376-377.)

The first group, as its designation ‘‘ Investments”’

implies, consists of relatively permanent assets and

the aecounting rules are ¢arefully framed ‘to main-

tain this characteristic of the accounts included

therein. For example, property in the telephone

plant accounts is that ‘‘which ordinarily has a serv-

ice life of more than 1 year’’ (Instruction 20 (A),

R. 107) and account 101.2, ‘Advances to affiliated

companies,’’ which is in the ‘‘Investments”’ group,

comprises advances which are to be funded or

which are not subject to current cash settlement

(Instruction 3.(M), R. 101). Not only does the

classification of account 100.4 in the investment

group indicate that it represents assets of a semi-

permanent character, but it is given a sub-number

under the main account number covering telephone

plant. If the Commission had regarded this ac-

count as a suspense account or had intended others

to so regard it, it would have been included in the

Pee WP eetEe ose

= ;

group of balance-sheet accounts designated ‘‘Pre-

paid Accounts and Deferred Charges.’’

Appellants, in contending that account 100.4 is

a suspense account, treat the account as if items

therein would permanently remain in the same con-

tingent status as when they are first entered. -It may

be true that at that moment such iterns are subject

to the contingency that the Commission will re-

quire them to be written off by a charge to surplus.

But the statement in the accounting rules ‘‘shall

be disposed of,’’ ete., in accordance with the di-

rections of the Commission presupposes that the

Commission will make prompt disposition of these

amounts. Once the Commission has acted as thus

provided, amounts which it requires to be written

off will be extinguished from the account and the

balance remaining in the aecount will thereafter

represent investment in assets of just as real and

permanent a character as those represented by the

other telephone plant balance-sheet accounts, 100.1,

100.2, and 100.3.

The basis for the preceding statement is as foal-

lows: Apart from writing off, the Commission may

provide for amortization or it may provide for

other disposition of amounts in 100.4. If it pro-

vides for amortization, it will direct that over a

given period of time a charge be made.to operating

expense or to surplus and a corresponding :redit

to amortization reserve and that, at the end of

such period, the sum of these charges be debited to

amortization reserve and credited to account 100.4.

During this period the amount for which amortiza-

tion is provided has ‘as much the character of an

investment asset as has property which is subject

to depreciation charges.’ The other kind of in-

vestment represented by 100.4, as, for example,

excess value of land over and above original cost,

will consist of amounts as to which the Commis-

sion. has directed that they be retained in the

account. . .

The supposititious balance-sheet set forth in the

brief of additional appellants (p. 16) is based on

testimony of one of:appellants’ witnesses that a

balance sheet would be incomplete if it failed ‘‘to

call specific attention.on its face to the fact that

the Commission must extinguish this item [account

100.4] and may extinguish it immediately.’? (R.

320.) As we have already shown, the statements

that the Commission may extinguish the account is

correct in the sense that at the moment amounts

are first entered therein, some or all of them may

be extinguished, but is substantially incorrect as

applied to the status of the account after the Com-

mission has given the directions which the account-

ing rules call for.” The statement that the Com-

® Such property remains in the plant account at the orig-

inal amount charged thereto until its retirement, when plant

account is credited and depreciation reserve is debited.

1° Tn the case. of any’ balancé sheet published before the

Commission had so acted, if it would be sound accounting

' practice to append a note to account 100.4, the note could be

so amplified as to guard against giving investors or others a

misleading impression as to the character of the account.

Pern te ee $

ee Ont) tee tern diel Sal 0 i inte BSF “*

mission must extingui@) account 100.4 is based

upon a misinterpretation of its order.

The Commission’s chief accountant stated that

the proper interpfetation of account 100.4 was that

amounts therein ‘“‘would be disposed of, after the

character of the item had been determined, in a

. manner consistent with the general rules underly-

ing the uniform system of accotmts for the dis-

tribution pf expenditures, according to their char-

acter, to operating expenses, income, surplus, or

remain an investment.”? (R. 476.) Another ae-

counting officer of the Commission declared that

appellants’ assumption that amounts in 100.4 must

be extinguished is ‘‘unwarranted’’ and “fails to

express the provisions of the Revised System of

Accounts.’’ (R, 518.) The acting director of the

accounting department of the Wisconsin Public

Service Commission, which had prescribed for elec-

tric utilities an account comparable to 100.4, ex-

pressed the opinion that, in view of the provision

for subdividing this account aecording to the char-

acter of the amounts therein, amounts in 100.4

“might be permanently retained in the investment

accounts, depreciated or amortized over the life of

the property, or subject to such other disposition as

might be appropriate.’’ (R. 527.) He also said

that after the Commission knows the facts it may

then issue appropriate directions ‘‘for the retention

‘or the disposal of the account in accordance with

the principles set forth in the system of accounts.”’

(R. 528.)

105168—36——5

Appellants’ argument that a reserve of surplus

must be maintained against account 100.4 presup-

poses that the Commission will arbitrarily and im-

properly direct that all amounts in this account be

written off, irrespective of their nature. This ar-

gument, as the District Court said, ‘‘requires the

assumption that the Commission will act improp-

erly in the future under 100.4 (¢). This cannot be

presumed.’ (R.568.) If the Commission should

in the future improperly order a write-off, the car-

rier could protect its rights by contesting the va-

lidity of this order in the courts. |

Appellants stress the word ‘‘adjustment”’ in the

title of account 100.4. But the inclusion of this

account among those grouped as ‘‘Investments”’

and its exclusion from_ those grouped under

the heading ‘‘Prepaid Accounts and Deferred

Charges”? removes any possible ambiguity arising

from use of this word.

Appellants place great reliance upon Matter of

New York Edison Co. v. Maltbiec, 244 App. Div. 685,

affirmed per curiam 271 N. Y. 103. The uniform

system of accounts for electric corporations pre-

scribed by the New York State Public Service

Commission contained a definition of original cost

similar to that in the 1936 System of Accounts and

provided for entering amounts in account 143 on

the same basis that amounts are entered in ac-

count 100.4. But account 143 differed radically

from account 100.4. The former was a true sus-

5 pein 3 ET eee eee Sheantabs * - sae rae RS RT aan ie aOR a Ry Dil el Set te te Tota.

pense account. Its title was “Suspense to be am-

ortized.”’ It appeared among the balance-sheet

accounts under the heading ‘‘Deferred Debits’’, a

group corresponding to those set forth under

the heading ‘‘Prepaid Accounts and Deferred

Charges”’ in the 1936 System of Accounts. There

was entered in account 143 not only amounts equiv-

alent to those entered in account 100.4, but also

miscellaneous debit items subject to amortization

by order of the Commission and losses from prop-

erty retirements not provided for in the depre-

ciation reserves. .

Account 143 differed from account 100.4 in an-

other important respect. Amounts in account 143

were to be ‘‘written off’? over such period and in

such manner as the Commission might prescribe ;

in other words, the account was to be written off

in its entirety out of surplus. By way of contrast,

the 1936 System of Accounts authorizes disposi-

tion of amounts in account 100.4 according to the

character of the individual items—by an imme-

diate write-off out of surplus, by amortization

through debits to surplus over a period of years

(infra, pp. 45-46), by amortization through charges

to operating expense over a period of years (id.),

by indefinite retention in this telephone plant in-

vestment account. This flexibility, the court below

said, ‘‘distinguishes the system at bar from that

held invalid in’? the New York Edison ease. (R.

568. ) | :

[ee ee Pe saci aah kali BYR? li aaa IY i Ak ll A Rin SALA Na a hola eet IRL H6s eat

oe Wistiete bible, cutie wae cskucen

While the Government does not assent to all of

the reasoning of the New York Appellate Division,

the holding itself, so far as it involves the original

cost provisions of the order of the New York Com-

mission, is clearly distinguishable.

4. THE PROVISION THAT THE COMMISSION MAY DIRECT THAT

PART OF THE EXPENDITURE MADE TO ACQUIRE THE PROP-

ERTY OF ANOTHER UTILITY BE WRITTEN OFF IS REASONABLE

AND WITHIN THE COMMISSION'S STATUTORY AUTHORITY

Additional appellants appear to contend that ae-

count 100.4 (C) is void in so far as it authorizes

the Commission to direct the writing off of

amounts in this account. They assert in their brief

(p. 14) that the Commission ‘‘has no power to re-

quire these appellants to write off and take as a

loss a part of what ‘ey actually paid for their

’ Since the Commission has not as yet 2

directed the writing off of any amount, the conten-

tion necessarily is that the Commission is wholly

without statutory authority to preéseribe an ac-

property.’

counting rule the effect of which is to deny the

right to capitalize, under any and all circumstances,

the entire amount expended in the acquisition ‘of |

property of another utility. The contention is

without merit unless such a rule is so utterly incon- |e.

sistent with accepted accounting principles that it

cannot be said to be an accounting rule which the

statute authorizes the Commission to prescribe.

The Commission, when it prescribes a system of

accounts, is not exercising its‘rate-making power

but, as shown later (infra, pp. 57-58), its power to

prescribe accounts includes the power to establish

accounts which will aid it in carrying out its other

statutory duties, including that of prescribing rea-

sonable rates and, charges. We therefore submit

that the Commission is authorized to prescribe ac-

counts which accord with the principles enforced

‘and applied in rate proceedings. Particularly is

such action authorized if it serves to make effective

another principle which this Court has recognized

as within the power to prescribe accounts, namely,

to make the accounts correspond with the substance

of the transactions they record (Kansas City South-

ern Ry. Co. v. United States, 231 U. 8. 423, 440,

mfra, p. 63).

There is no hard and fast, immutable line be-

tween expenditures which properly may be capital-

ized and those which may not. The extent to which’

it is proper to capitalize overhead expenses during

construction is a frequent source of controversy

and wide differences of view in rate proceedings.

See Los Angeles Gas & Elec. Corp. v. Railroad

Commission, 289 U.S..287, 294, 310. The question

_of whether an expenditure may be capitalized or

not is no different in principle from the question of

when and under what circumstances an expendi-

ture once capitalized should be extinguished from

capital account. The latter was the principal issue

_ presented in Kansas City Southern Ry. Co. v.

United States, 231 U. 8. 423. The price paid for

ee Te ee datendenheesinastibil

the purchase of property in transactions between

controlled companies is. no criterion as to what

should be entered into the capital account of the

purchasing company. (R.536.) Where buyer and

seller are under common control, part of the pur-

chase price for equipment may be excluded from

the purchaser’s property account in a rate proceed-

ing. Lindheimer v. Illinois Bell Telephone Co., 292

U.S. 151, 157.

It must also be borne in mind that even when

the transaction is between independent companies

the amount paid to acquire going telephone prop-

erty may frequently be in excess of every element

of value inherent in the property, including going-

concern and good-will value. Since the modern

telephone system, if it is to function efficiently,

must be closely coordinated and unified with re-

spect to both physical facilities and operating pol-

icies, an independent concern may have a very sub-

stantial ‘‘nuisance’’ value enabling it to command

a price in excess of actual value.

Tri-State Telephone & Telegraph Co. Proposed —

Control, 180 I. C. C. 229, illustrates this nuisance

value. The Tri-State owned the telephone ex-

changes in St. Paul and a Bell company those in

Minneapolis. From a plant and engineering

standpoint the two telephone properties consti-

tuted one telephone exchange area and the same

operating practices had to be observed in both

cities if delays, inefficiency and undue cost were. to

a — ence nes ce alt ~ a i TY

be avoided. The two companies had been only par-

tially successful in satisfactorily coordinating

service, and the difficulties in doing this were in-

creasing and promised to become much more

serious. The Bell company believed that inde-

pendent operation of the St: Paul exchange con-

stituted a serious hazard to its Minneapolis invest-

ment. Accordingly, it agreed to buy substantially

all the Tri-State stock for $19,510,101. This price

was more than double the appraised value of the

assets represented by the stock, excluding organi-

zation expenses and ‘going value, and more than

"150% of such value if these intangibles were in-

cluded. The difference between price and value

was so great that the Commission refused to issue

- a certificate that the acquisition would be in the

public interest.”

If the foregoing transaction had been carried out

aud the Bell Company had then taken over the

Tri-State property, the cost thereof would have

been the amount paid for the stock, or over 50%

more than every,element of value attaching to the

assets acquired, including intangibles. Under the

1933 System of Accounts this excess would go into

_ Within fifteen months of this decision an agreement was

reached for the sale to the Bell Company of the Tri-State

stock for approximately $7,000,000 less than the price pre-

viously agreed upon and the Commission thereupon issued a

certificate of public interest under Section 5 (9) of the Inter-

state Commerce Act. TZri-State Telephone & Telegraph Co.

Control, 193 I. C. C. 383. .

. shit ‘ rad Sipie oSTae. als pe BINT ra lala

> ne P Bit ASE ihre vt al RAE ARE SA is eT tal ta ete aye

rreaghes 2

account 278, and therefore into the balance-sheet

account representing telephone plant, unless the

company voluntarily amortized all or a part of the

excess by debiting surplus. An accounting system

which permits this kind of an inflation of the tele-.

phone plant account impairs its integrity. We do

not contend that payments in excess of value for

going telephone concerns or their property may

not be justified from a business standpoint, but that

the excess payment should be charged against past

or future profit and loss, either by an immediate

debit to surplus or by amortization chargeable to

‘surplus over a period of time. Furthermore, such

charges should not be left to the discretion of the

accounting company, but should be subject to the

control of the regulatory body whose duty it is to

prescribe uniform accounts and to see that ‘they

are carried out in accordance with their intended

purpose and effect.

Acquisition of Control. of: Northwestern Long

Distance Telephone Co., 71 I. C. C. 530, is another

instance where the purchase price was largely dic-

tated by nuisance value: A Bell company agreed

to pay $545,000‘for the property, of a company

operating toll lines between exchanges all of which

were reached by the Bell company’s toll lines. The

latter’s facilities were ample to handle the business

of both companies for years to come. The value to

the purchaser of the property to be acquired was

therefore only its junk or salvage value, as the

Commission recognized by stating that the invest-

ment could bé amortized in a few years’ time out

of the additional revenues to be obtained from

business formerly handled by the competitor.

An accounting system which provides that a com-

pany may, whatever the circumstances, record its

telephone plant on its balance sheet in terms of the

money, plus the value of any consideration other

than money,” exchanged for telephone ‘plant, con-

eeats data which is truly informing and supplies

that which is likely to be misleading. Acquisition

of Illinois Southern Telephone Co., 145 I. C. C. 43,

illustrates this situation. A new company was to

be formed to buy all the assets of four existing

telephone companies (the stockholders of which

were identical), giving in exchange therefor cash

(derived from sale to the public of certain amounts

of its bonds and preferred stock) and 40,000 shares

of its common stock. In substance, therefore, tliere

was a mere recapitalization involving no change in

beneficial ownership, but ‘‘cost’’ to the new com-

pany was the cash which it had paid out and the

value attributable to its common stock. The almost

untrammeled latitude afforded the company’s offi-

cers and accountants in determining ex parte such

12 See Mstruction 20 (B) of the 1933 System of Accounts

(R. 365) and account 100.4, par (A), of the 1936 System of

Accounts (R. 123).

ee er ee eae .

common stock value is obvious * and the epportu-

nity afforded to mislead investors is equally obvi-

ous. Although the Interstate Commerce Commis-

sion refused to issue a certificate of public interest,

upon -the ground that the proposed financing

‘*would increase largely the securities outstanding

in the hands of the public without the addition of

any property’’, the transaction was carried out

under approval given by the Illinois Commerce

Commission (H. Rept. No. 1273, 73d Cong., 2d

Sess., p. XIX).”

Possibly appellants will urge that public regula-

tion of acquisitions of telephone property is ade-

quate to guard against abuse and that therefore no

good reason exists for the adoption ‘of an account-

ing rule which permits the Commission to direct

the writing off of part of the consideration given

for telephone property acquired from another

utility. There’are a number of grounds why such

a contention must be rejected.

*8 The Illinois Commerce Commission, in approving the

acquisition, apparently made no independent examination

of the property appraisals which were submitted to it and

apparently assumed that the no-par common stock would

be capitalized at the minimum of $5 a share required by

Illinois law. (145 I. C. C. 43,45.) Actually, tlie new com-

pany capitalized its common stock at eight times this amount,

$40 a share. (Poor's Public Utilities Manual, 1929, p.

1300.)

‘4 The company making the acquisition is not an ap-

pellant, but it is controlled by the same holding company

as the additional appellants. (Moody's Public Utilities

Manual, 1935, p. 510.) :

—_— wees aL FD ek na

The question of possible state regulation may be

‘summarily put aside. The Federal Government is

not constrained to withhold exercise of its constitu-

tional powers because the individual states may

step into the breach if it does not act. The very

purpose of Federal control within the interstate

commerce field is to achieve uniformity in regula-

tion, which-cannot be achieved under the varying

regulatory provisions (or none at all) of the laws

of the several states.

Such regulatory powers as are or have been

vested in the federal Governmeént are inadequate to

meet the purposes of the accounting provision in

- question. Section 221 (a) of the Communications

Act, infra, p. 72, and the preceding Section 5 (18)

of the Interstate Commerce Act, which relate to

consolidations of property of two companies and

acquisitions of stock or leasehold control, do not

require federal approval of these transactions;

they merely provide that any federal law making

"the transaction unlawful shall not apply to a trans-

action approved thereunder. Section 214- (a) of

the Communications Act, infra, p. 72, makes it un-—

lawful to acquire or operate a telephone ‘‘line’’

without a certificate from the Commission, but

there was no similar provision applicable to tele-

phone companies in the Interstate Commerce Act.

(Compare See. (1) 18 of that Act.) Accordingly,

in the case of property acquisitions prior to the

summer of 1934, there wis no necessity for obtain-

ee 40

ing federal approval unless the acquisition might

otherwise fall within the prohibitions of the fed-

eral antitrust laws. But apart from this consider-

ation, there is no reason why such regulatory con-

- trol as these statutory provisions authorize should

not be supplemented by an appropriate exercise

‘* of the Commission’s power to regulate accounts.

The disparity between price and the value of the

property acquired need not be so great so as to

make the transaction not.in the public interest,

even though the price might be in excess of every

element of value which it would be proper to carry |

in capital account as a continuing asset.

5. PARAGRAPH (C) OF ACCOUNT 100.4 IS NOT INVAT 1D BY REASON

OF THE FACT THAT IT DOES NOT ITSELF LAY DOWN THE

RULES BY WHICH THE COMMISSION WILL ACT: IN DIRECT-

ING THE WRITING OFF, OTHER DISPOSITION, OR AMORTIZA-

‘TION OF AMOUNTS IN THIS ACCOUNT.

Paragraph (C) of account 100.4 provides that

amounts in this account shall be written off, dis-

posed of, or amortized according to the directions

~ of the Commission. Apart from the contention

already considered that this operates to make aec-

count 100.4 a suspense account, appellants attack

this provision (Br., pp. 27-31), not on taconstitu-

tional grounds, but on the ground that it is beyond

the Commission’s statutory authority. The con-

tentions seem to be (1) that when an accounting

regulation fails to state specifically the rule or

rules in accordance with which amounts entered

Nines La Da aA RI ee tM A Ab SE SRG CL Co te

po oe peep er eatin

therein shall be ultimately disposed of, it does not

constitute an accounting rule of the kind contem-

plated by the statute and (2) that the authority

given the Commission to prescribe a system of ac-

counts does not include the authority to reserve to

itself power of control over the disposition of par-

ticular items. The two contentions are so inter-

related that no attempt will be made to consider

them separately. | |

There is no doubt that account 100.4 clearly

specifies the accounting requirements which it im-

poses. Paragraph (A) sets forth the exact method

whereby amounts to be entered in the account shall

be determined. Paragraph (B) requires a sub-

division of these amounts according to their char-

acter. Paragraph (C) provides that the company

shall follow the directions given by the Commission

as to the subsequent disposition of amounts re-

corded in the account. <A rule which leaves the

accounting company in no doubt as to what entries

it should make in its books of accounts would seem

to constitute a valid exercise‘of the authority given

by the Act to prescribe the forms of accounts and

records to be kept by carriers subject to the Act.

Appellants do not assert that the Commission is

without authority to exercise regulatory power

with respect to accounting for particular items or

transactions. Any such contention would be

plainly erroneous; no system of accounts can be’

framed in such detail that it can be applied with-

out further intervention or interpretation by the

regulatory body."” Such a contention would also

be directly inconsistent with the power exercised

by the Interstate Commerce Commission over a

long period of time, under identical statutory au-

thority, to direct the accounting entries to be made

in recording a particular transaction or particular

property, anu exercise of power which has received

the approval of this Court. Norfolk d& Western

Ry. Co. v. United States, 287 U.S. 184. See also

Atlanta, Birmingham d& Coast R. R. Co. v. United,

States, 296 U.S. 33; Chesapeake & Ohio Ry. Co. v.

United States, 5 F. Supp. 7; Accounting of New

York Telephone Co., 188 I. C. C. 83; Acquisition

of Property by Saratoga & Encampment Valley

R. R. Co., 192 1. C. C. 719.

Sinee, therefore, the statute gives the Commis-

sion some authority to direct the disposition of

particular items, the question here presented con-

cerns the possible. limits of this authority. Are

those limits transcended if the Commission, as to

the class of transactions which come within account

100.4, fails to announce in advance the rules in

accordance with which it will direct disposition of

* In Accounting Bulletin No. 11, issued June 26, 1916, ef-

fective July 1, 1916, the Interstate Commerce Commission

embodied the more important rulings and interpretations

which it had made in administering the uniform system of

accounts for telephone companies, effective January 1, 1913.

The Bulletin consists of 176 “Cases” set forth in the form

of “Query” and “Answer”.

» es

ie take -. iNlayae At

amounts in this aecount? We submit that the

answer to this question depends upon whether or

not, under all the circumstances affecting proper

accounting for the class of transactions in question,

the failure to lay down advance rules is manifestly

Without reasonable justification, If this is so, the

situation under consideration is altogether differ-

ent from that which appellants suggest (Br., p. 29)

as analogous, namely, ‘fan order merely providing

that all entries shall"be made as the C3mmission,

in its discretion, may direct”’.

In view of the multitude of factors affecting

proper accounting for amounts in account 100.4, a

rule which attempted to specify in advance in what

manner each such amount should ultimately be re-

corded would seem so likely to prove inequitable and

unduly rigid in practice that the rule would be far

more open to the charge that it was arbitrary than

one which reserves to the regulatory body necessary

flexibility in dealing by appropriate proceedings

with the facts and circumstances presented in indi-

vidual cases as they arise.

In the accounts for electric utilities prescribed

by the Wisconsin Public Service Commission there

is an account termed * Fixed Capital Purchase Ad-

justment’’ comparable to account 100.4. The act-

ing director of the Department of --counts and

Finance of that Commission stated that he had

found that the nature of the items entering into

this comparable account. differed according to the

—

facts in individual cases, and that under such con-

ditions it was ‘‘practically impossible to make a

uniform rule with respect to the disposition of

amounts’? in such an account. (R. 528.) He

added that, when the facts were known, appro-

priate directions might then be issued ‘‘for the re-

tention or the disposal of the account in accord-

ance with the principles set forth in the system of

accounts’. Another Commission witness stated

that the reservation of power to deal with individ-

ual property acquisitions was ‘‘necessary in order

that limitations may. not prevent proper regula-

tion’’. (R. 490.)

Moreover, it cannot be assumed that the Com-

mission, in acting under paragraph (C), is without

standard or guide. The entire body of accounting

rules furnishes the controlling principles in accord-

ance With which it will exercise its authority. The

situation is not dissimilar to that considered in

New York Central Securities Co. v. United States,

287 U.S. 12, 24, where the carrier urged that au-

thority given the Interstate Commerce Commission

to approve acquisitions of control which it found

to be in the ‘‘publie interest’? was an uncoustitu- .

tional delegation of legislative power because the

statute furnished no standard to guide determina-

tion of this question. This Court said that a suffi-

cient standard was to be derived from the ‘‘ purpose

of the Act, the requirements it imposes, and the -

context of the provision in question’’. In like man-

Pastis gee tintin abide cag ani LS SRE SUR RERUN

3a0 Soe Pay ae Sa agit cet hie tr be Cth na Sw

BE Rib aE eh

oon ~*~

ner, the purpose of the system of accounts adopted

by the Communications Commission, the require-

ments which the system imposes, and the context

of paragraph (C), together with the general prin-

ciples of correct accounting, supply a standard by

which the Commission may determine the direc-

tions it should give as to the writing off, amortiza-

tion, or other disposition of amounts in 100.4.

6. SINCE THE COMMISSION’S ORDER PERMITS AMORTIZATION

CHARGEABLE AS AN OPERATING EXPENSE OF AMOUNTS IN

ACCOUNT 100.4, IT PROTECTS ANY SUBSTANTIVE RIGHT

WHICH APPELLANTS MAY HAVE TO CHARGE DEPRECIATION

AGAINST AMOUNTS IN THIS ACCOUNT.

Appellants contend that the Commission’s order

is arbitrary because it does not permit depreciation

charges against amounts included in account 100.4.

The. account is to be subdivided according to the

character of the items which it contains and the

Commission may direct that provision be made for

amortization of amounts in this account. The

Commission may therefore provide for amortiza-

tion of such amounts in the account as may be

properly classified as investment in ‘depreciable

property. This depreciable property investment

_. Would appropriately be subdivided upon the basis

. of the classifications in the primary plant accounts

and amortization might be provided on a basis

equivalent to the depreciation rate applicable to

‘the particular property classifieation.

ee.

The Commission’s order provides for amortiza-

tion chargeable as an operating expense (account

613, R. 186) and amortization by debs to surplus

(account 413, R. 167). Both classes of amortiza-

tion charges are credited to amortization reserve

(account 172, R: 140), which specifically provides

that it shall also be credited with any amounts re-

sulting from amortization of balances in account

100.4. Both of the accounting officers of the Com-

mission whose affidavits were received in evidence

stated that paragraph (C) permitted amortization

chargeable as an operating expense. (R. 476, 512,

517, 520.) Another Commission witness expressed

the same view (R. 537) and the District Court _

(R. 568) likewise adopted this interpretation. We

’ therefore submit that the evidence establishes that

the Commission’s order permits amortization of

amounts in 100.4 through a charge to operating ex-

pense. If, however, there were uncertainty as to

the correctness of this construction and if a-con-

trary construction might appear to infringe ap-

pellants’ constitutional rights, the uncertainty is

removed by application of the familiar male that

in interpreting statutory provisions or/adminis-

trative regulations, if two constructions are pos-

sible, one of which would give rise to serious con-.

stitutional doubts and one of which avoids such

doubts, the katter construction will be adopted.

Addy Co. v. United States, 264 U. 8.:239, 245.

The fact that the Commission might possibly ap-

ply its order in an unconstitutional manner does

ce ]

Se ee ee ee

Ray per See Ca ca re RE rh nooemtioney

| 47

not, in advance of such improper application, de-

prive appellants of property without due process.

Nor are they deprived of any substantive right if,-

by means of amortization, provision may be made

for the building up of a reserve, through charges

to operating expense, which will prote¢t their

property investment. a

The District Court rejected the contention that

the failure to allow depreciation as such against

amounts in 100.4 made the original cost provisions

arbitrary, saying (R. 568-569) : |

This complaint anticipates arbitrary action

by the Commission, under 100.4 (c) which

authorizes handling of this item through’

amortization. The effect would be the same

as writing down through depreciation, and

until the Commission acts so that the ac-

counts become so contrary to the principles

of correct accounting as to constitute the

Commission’s order arbitrary and unreason-

able, the Commission is within its powers.

What is essential from the standpoint of the

principles of sound accounting in the matter of

depreciation is that some provision be made for an

annual ee to income which will build up a re-

serve against which may uitimately be charged the .

loss ensuing when the serviceable life of deprecia-

ble property has expired and the preperty is -

scrapped. Whatever basis is used for determin-

ing this annual charge, whether replacement cost

at time of acquisition or original cost or current

value from year to year (cf. United Railways vy.

48 [

West, 280 U.S. 234), there is not, and in the nature

of the case there never can be, any assurance that

the reserve accumulated will exactly correspond to

the cost of replacing the property at the particular

time when it reaches the end of its useful life." As

Commissioner Eastman observed in Telephone aad

Railroad Depreciation Charges, 177 I. ©. ©. 3

381, ‘‘Accounting is not an exact science.’’ We

submit that there is no violation of the constitu-

tional guarantee of due process if, in the case of |

property placed in public service by another utility

and subsequently acquired from it, depreciation

charges as such are calculated on the basis of the

original cost of the property to the company first

placing it in public service.

In practically every such acquisition, what is ac-

quired is not specific pieces of depreciable prop-

erty but rather a guing plant or business for which

a lump sum is paid. This lump sum is obviously

measured by the value of the going plant or busi-

ness as a whole. It therefore practically never

eorresponds to the value of the specific items of

depreciable property acquired, on whatever basis

they are valued. The value or cost to the pur-

chaser of the depreciable property acquired is

merged or lost in the total price paid for the ac-

quired busifiess asa whole. The problem is there- -

“1% See Anowville v. Knoxville Water Co., 212 U. S. 1,

13-14, where it was said that the purpose of depreciation

charges was to make provision from earnings for replacing

the property at the end of its life.

fore presented as to what method shall be employed

for setting up the cost of the individual units of de-

preciable property on the books of the purchaser

as a basis for annual depreciation charges.

One possible method is that provided by the 1935

System of Accounts, namely, to enter the depreci-

able property on the books of the purchaser at the

estimated replacement cost of each item at the date

of the acquisition and to base depreciation on these

figures. This is essentially artificial because it

rests on the fiction that what was purchased at the

time of the acquisition was the specific items of

property at the price for each item then prevail-

ing in the market, whereas in reality what was pur-

chased'was a going business as a whole without spe-

cific regard for the particular units of property.

This method of accounting is also open to the prac-

tical objection that it affords opportunity for im-

proper inflation of depreciation charges, since

there can be no adequate administrative check

upon appraisals of replacement cost at excessively

high figures. Another possible method, that

adopted in the 1936 System of Accounts, is to

record the individual units of property at their

cost when first devoted to the public service, 1. ¢.,

at the same figures which served as the basis for

depreciating those items when they were in the

hands of the former owner. This means that each

such item of property will continue to be depre-

ciated after the acquisition on the same basis as

-before without permitting the sale of the business

as a whole to alter the basis of depreciation of the

specific items of depreciable property.

We submit that there is no violatign of any con-

stitutional right in requiring the use of the latter —

method of calculating depreciation for accounting

purposeg instead of the former. “Appellants seem

to contend that depreciation must be based on cost

to the owner in whose hands the property is being

depreciated and that, where property already in

public service is acquired by a subsequent owner, .

the cost to the latter is replacement cost at the mo-

ment of the acquisition. Lrrespective of the valid-

ity of this contention as applied to the purchase of

specific items of property as such, it clearly has no

application where the property transferred is part

of a going business for which a lump sum is paid,

since it is purely artificial to say that the specific

items of property are included in the lump sum

price at the figures which represent the respective

replacement costs of these individual items in the

open market. ‘

Irrespective of whether depreciable property is

set up on the books and depreciated on the basis of

its original cost or on the basis of its artifivial re-

placement cost at the actual moment,of transfer as

part of a going business, the real and substantial

question is this: What disposition shall be made

of the difference between such original cost or re-

placement cost, on the one hand, and the lump-sum

acquisition cost of the business as a whgle, on the

Sa ~ . oe oe we ees eee te Mata bmn ~e _ <a.

other hand? This problem exists whichever basis

is adopted for recording the depreciable items.

Under the 1933 System of Accounts, this difference ,

goes into account 278, where it remains as a per-

manent asset item unless the accounting company

voluntarily amortizes it by debiting surplus.

Under the 1936 System of Accounts, the difference

goes into account 100.4 and, as already shown, such

part of the difference as should properly be amor-

tized by, charging operating expenses may be so

amortized. For example, if in a particular case a

part of the excess of the lump sum paid for the

business as a whole seems fairly attributable to the

fact that there has been a rise in the open-market

price of some or all of depreciable items of prop-

erty of the kind included in the purchase, then it

would obviously be. appropriate to amortize such

part of the excess out of current operating ex-

penses. On the other hand, such part of the excess

as appears to be attributable to the business ad-

vantage of acquiring a going concern at somewhat

more than its individual assets are actually worth

may appropriately be amortized by debiting sur-

plus. It may well be that this method of dealing

with the sums in question may be considered as -

not ideally the best method, but we submit that it

is a method within the bounds of reasonableness

and therefore not so inherently arbitrary as to vio-

late the constitutional guarantee of the Fifth

Amendment.

Additional appellants contend (Br., pp. 20-22)

that the failure to make specific provision for de-

preciation on amounts in account 100.4 is in con-

flict with the requirements of Section 220 (b) of

the Act, supra, pp. 4-5. That section provides that

the Commission shall, as soon as practicable, pre-

seribe the ‘‘classes of property’’ for which de-

_preciation charges may be included under operat-

ing expenses. The section, except for immaterial

changes in verbiage, is the same as language added

to Section 20 (5) of the Interstate Commerce Act

by Section 435 of the Transportation Act, 1920

(41 Stat. 493). As pointed out in Telephone and

Railroad Depreciation Charges, 177 1. C. C. 351,

360-369, this amendment was not in derogation of,

but in confirmation of, the general powers over ac-

counts previously vested in the Interstate Com-

merce Commission (in language identical with

Section 220 (a) of the Communications Act), and

the major purpose of the amendment was to bring

about a fuller exercise of existing power with

reference to depreciation charges. -

There are two possible interpretations of Sec-

tion 220 (b), neither of which aids appellants. If

prescribing the ‘‘classes of property’? on. which

depreciation may be charged embraces the power

(1) to determine the classes ‘of property which are

depreciable and (2) to determine the base on which

depreciation: shall be computed as to. property

classified as depreciable, the Commission’s order

constitutes an exercise of both these powers and

is therefore not in conflict with Section 220 (b).

\ 53

There.is no implication ,in the language of the

section that the Commission, if it lays down rules

as to the depreciation base, must establish the

same base for all property of the same class, irre-

spective of the manner of its acquisition. If, how-

ever, the authorization in Section 220 (b) is inter-

preted as confined to classifying property accord-

ing to whether it is or is not depreciable, then

determination of the depreciation base—a neces-

sary incident to the power to prescribe rules cover-

ing depreciation charges—flows from the Commis-

sion’s general power over accounts and is not

affected by or in confliét with Section 220 (b).

7. THE. ORIGINAL COST PROVISIONS ARE NOT INVALID BY

REASON UF THE COST OF COMPLIANCE.

A regulation validly imposed in the exercise of

public regulatory authority is not rendered invalid

because compliance therewith will subject the util-

ity to additional expense. Cost of compliance is

not even relevant to the question of validity unless,

possibly, when such cost is shown to be entirely dis-

proportionate to any public benefit which may rea-

sonably follow from the regulation. Whether the

public benefit justifies the cost of compliance pre-

sents‘a problem calling for the exercise of admin-

istrative judgment and where such a question is .

presented the courts decline to substitute their

judgment for that of the body charged with execu-

tion of the law. —

We submit also that appellants have not shown

that the original. cost provisions are unduly bur-

densome. ‘They refer to the estimate that the cost

to the Bell’companies of putting these provisions

into effect would be ‘‘several millions of dollars.”

.(R. 341.) The only estimate which was based upon

a detailed study of the work involved is to the effect °

that the cost to the New York Telephone Company

would be $432,100. (R.332.) Since the net oper-

ating income of this company was over $32,000,000

in 1935 (Moody’s Public Utilities Manual 1936, p.

182), this cost would be only a little over 1% of

such income. Moreover, this is not an annual, re-

curring cost. Once the property now held is re-

stated on the basis of original cost, accounting for

future acquisitions from utilities would probably

be less costly than at present because, except as to

the few companies not subject to the Commission’s

order, the vendor’s books will show original cost |

and the purchaser will take over the property at

these book amounts.

There is no reason to suppose that the Commis-

sion will be unduly exacting in the identification

of property subject to restatement on the basis of

original cost. Its order provides that in account-

ing for retirement of telephone plant, ‘‘average’’

original cost shall be used in determining the origi-

nal cost of the items retired when ‘‘it is im-

practicable to determine the original cost of

each item due to the relatively large number

>, ~. oa = a

GEST Nie Se PS a nee ee ae LI TE POETS OO TR WT IRIE 8 IN KR EMER oe

ay ARC ore SRI a PUT ae NO pete ae DENS Oe eee

RO REE OY te LO TR ss PROM R MTR SS

Sigs fol MR FOOL Re Lae Pe AE Op Re? i

= ” . oe .

nes ;

or small cost of such items.’ (Instruction

25 (D), ‘R. 114.) The Commission may be ex-

pected to permit the use, in appropriate cases, of

the same principle of averaging for determining

- to what extent property previously acquired from

other utilities is still in existence.

Congress has authorized the Commission to re-

quire telephone companies to file with it a statment

showing original cost of their property. (Sec.

213 (c).) The grant of this authority amounts to

~ a legislative determination that to require the fur-

nishing of this information is not unreasonably

burdensome. _

III

THE PROVISION THAT THE.CHARGES TO CERTAIN AC-

COUNTS SHALL BE JUST AND REASONABLE AND THAT

PAYMENTS IN EXCESS THEREOF SHALL BE CHARGED

AS A NON-OPERATING EXPENSE IS NOT ARBITRARY OR

- UNREASONABLE

* Instruction 2 (B. 1) provides (R. 98):

‘ All charges to the accounts prescribed in

this classification for telephone plant, in-

come, operating revenues, and operating

expenses shall be just and reasonable and

any payments by the company in excess of

such just and reasonable charges shall be

included in account 323, ‘‘Miscellaneous

income eharges’’.

We subscribe to appellants’ statement (Br.; p.

37) that net operating income is ‘‘one of the most

vital items in the companies’ statements, of wide

interest to investors and others’’. ‘But their fur-

ther statement: ‘‘ Whether an outlay of an operat-

ing expense was reasonable or unreasonable, being

paid and non-recoverable, it nevertheless is an out-

lay which should enter inte the computation of net

operating income,’’ rests upon the untenable propo-

sition that any amount, however unreasonable,

which a controlling company exacts in payment for

services or property should be charged in full to

operating expense. In such circumstances the

excess payment is not a true expense of operation

or a true item of cost of property, but is special

tribute levied by reason of corporate control. If.

this tribute is accounted for a8 operating expense

or is added to telephone plant account (thereby

increasing depreciation charges, an operating ex-

pense), the statement-of net operating income on

the books of account is falsified by the inclusion

therein of items which ought to be a charge against

non-operating income. (R. 513.)

All but a small fraction of the country’s tele-

phone business is performed by holding company

systems so that amounts paid for telephone plant

and for services chargeable to operating expense

are “‘in a large part paid to affiliated companies

and are not results of arms-length transactions’’.

(R. 539.) In rate litigation, charges for services

and for property, in transactions between compa-

nies in the same system, are recognized, in the com-

| OS webs ni Tine i asters yee ois PUR

3 fo Sakbicnca inhale Litera, tote aA tines bere athe od

—_——

putation of operating income and of property de-

voted to the public service, only to the extent that

the charges are reasonable. Smith v. Illinois Bell

Telephone Co., 282 U. 8. 133; Lindheimer-v. Illi-

nois Bell Telephone Co., 292 U. 8S. 151; Dayton

Power & Light Co. v. Public Utilities Commission,

292 U.S. 290; Columbus Gas & Fuel Co. v. Public ‘

Utilities Commission, 292 U. S. 398. In the liti-

gation before the#ourt in the two telephone cases -

it was found that the average annual overpay-

ments to the parent company for services during

a five-year period had amounted to $545,443 and

that equipment had been purchased from a sub-

sidiary of the same parent at prices in ‘excess of

what was reasonable. (292 U. 8S. 151, 157, 165.)

One of the duties of the Communications Com-

mission is to prescribe just and reasonable charges |

for telephone companies. (Sec. 205.) It is also

specifically authorized to examine into transactions

which relate to the furnishing of equipment sup-

plies, research, services, finances, etc., which may

affect carriers’ charges for the services which they

render. (Sec. 215 (a).) In Norfolk & Western Sad

Ry. Co. v. United States, 287 U.S. 134, the carrier,

in challenging an order which required it to clas-

sify certain coal mines as non-transportation prop-

erty, contended (pp. 138-139) that the general

discretion given the Interstate Commerce Commis-

sion to prescribe a uniform system of accounts was

limited by the purposes and ends for which such

- 08

accounts are to be kept, as exhibited in other sec-

tions of the Act. This Court adopted this as a

proper test to apply and one of the grounds (pp.

140-141) upon which it affirmed the Commission’s

_order was that two other sections of the Act “‘draw

the very distinction’’ between transportation and

non-transportation property which the accounting

rule in question had long enforced. ane,

In Kansas, City Southern Ry. Co. v.. United

States, 231 U. S. 423, the Court gave as a reason

for sustaining an accounting order, that it would

aid the Commission in the performance of other of .

its statutory duties. The Court said (p. 445):

Since the regulation of the railroad car-

rier by the public authority, arid especially

the fixing of the rates to be charged, depend

primarily upon two fundamental considera-

tions, (a) the{value of the property. that is

employed in the public service, and (b) the

current cost of carrying on that service, it

is clear that the maintenance of a proper .

line of distinction between property ac-

counts and operating accounts is essential to

the execution by the Interstaté Commerce

Commission of the supervisory and regula-

tory powers conferred upon it by Congress.

- See also Interstate Commerce Commission v.

_ Goodrich Transit Co., 224 U. 8, 194, 211, 213-214,

216. :

Since the power to prescribe uniform accounts

‘includes the power to inquire into expenditures

and their proper assignment in the accounts’’ and

«power to prevent evasion * * * and detect in

any formal compliance or in the assignment of

expenses a“‘possible concealment of forbidden prac-

tices’? (Smith v. Interstate Commerce Commis-

sion, 245 U.S. 33, 43, 45), the power clearly exists to

prescribe accounting rules designed to prevent eva-

_ sion before the event rather than after.. This is the

purpose and effect of the provision as to just and

reasonable charges. It enables the Commission

to pertog ina practicable manner the duty rest-

ing on i to see — accounts subject to its juris-

_-ddiction truly reflect™the transactions which they

purport to record. Without this power, the bur-

den of determining whether entries recording

transactions between affiliated companies represent

a true statement of operating income, operating ex-

pense or telephone plant account ‘‘ would be such as

to destroy all effective regulation”’; each and every :

such entry would have to be audited by the Com-

mission ‘‘before any credence whatsoever could be

attached to it.’’ (R. 539.) |

_ The regulation in question is therefore justified

on two grounds, first, as an aid in the performance

of other duties which the statute imposes upon the

Commission and, second, as a reasonable means for

making effective a cardinal principle qf any ae-

counting system promulgated by a regulatory body,

that the accounts shall faithfully represent the sub-

stance of the transactions which they record (infra,

p. 63).

Appellants assert (Br. p. 37) that the statute

makes failure to comply with an accounting order

of the Commission a penal offense and assert (Br.,

p. 38) that the obvious purpose of the accounting

rule as to just and reasonable charges ‘‘is to allow

the Commission, through fear of criminal prosecu-

-tion, to impose its judgment on the company as to -

the reasonableness of every outlay”’. ,

Appellants do not specify the penal provisions to

'» which they refer. Section 220 (e), supra, pp. 5-6,

and Sections 501 and 502, infra, pp. 73--74, which see-

tions contain the only penal provisions which might

be applicable, are limited to acts done ‘wilfully

and knowingly” or ‘‘wilfully’’. It is clear that, in

the absence of actual bad faith, an entry of a charge

in excess of an aryount which was subsequently de-

termined to be just and reasonable would not be the

wilful or knowing violation condemned by these

sections. In addition, Section 220 (d), supra, p.

- 5, provides a forfeiture, which under Section 504,

infra, p. 74, is recoverable in a civil suit, if a carrier

fails or refuses to keep such accounts as the Com-

mission shall prescribe and in the manner pre-

seribed by it. In any proceeding under this section

the defendant would be free to make the defense, if

it is a valid one, that ‘‘just-and réasonable”’ is not

a sufficiently definite standard to support a money

forfeiture.

The provisions of Section 220 (d) are almost

identical with those of Section 20 (6) of the Inter-

- state Commerce Act. - Although the latter section

61 .

has been in effect since 1906 (Act of June 29, 1906,

34 Stat. 594), the only reported case under this sec- ,

tion, United States v. Clyde S. S. Co., 36 F. (2d) ~

691, certiorari denied 281 U. 8. 744, was a proceed-

ing, not for failure to keep accounts as prescribed,

but for refusal to permit the Commissiof to inspect

accounts and records.

The Interstate Commerce Commission endeavors

to adjust infractions of its accounting rules through

correspondence or conference and, if necessary,

issues 2 report, but usually not an. order, indicating

the correction to bemade. United States v. Atlanta,

Birmingham & Coast R. R. Co., 282 U. 8. 522. If’

the carrier still resists, the Commission issues an

order, the legality of which may be tested in a suit

to set. it aside. Norfolk & Western Ry. Co. v.

_ United States, supra; Atlanta, Birmingham &

Coast R. R. Co. v. United States, 296 U.S. 33. We

submit that it is improper to assume that the Com-

munications Commission will proceed in any less

reasonable or orderly manner, or that ‘the forfei-

tures authorized by Section 220 (d) will operate to

coerce appellants into submission to the will of the

Commissiqn..

The requirement that the charges to certain ac-

counts shall be just and reasonable materially

affects only a very limited class of transactions.

Typical of these are contracts under which a hold-

ing company furnishes services to subsidiaries or

under which one company supplies equipment to

another, both being under common control. Since

the terms of such contracts are usually uniform for

all affiliated companies, the reasonableness of the

charges thereunder can be readily removed from

the area of doubt by presenting the matter to the

Commission pursuant to Instruction 9 (R. 104).

After it issues its directions or order, the contents

_ of the words ‘‘just and reasonable’’ and the obli-

_ gation of the company with respect thereto are

precise and definite. As was said of a tax which

was attacked as failing to define the scope of the

obligation, but which might be clarified by admin-

istrative action, ‘‘The demands of due process are

satisfied if reasonably clear definition is afforded

in time to give the taxpayer an. opportunity to

comply.’ Pacific Tel. & Tel. Co. v. Seattle, 291

U. S. 300, 304. ieee

We also submit that the words ‘“‘just and rea-

sonable’’ furnish an adequate guide to the obliga-

tions which the requirement in question imposes.

The District Court pertinently observed (R. 571)

that the cases such as United States v. Cohen

Grocery Co., 255 U. S. 81, upon whieh appellants

rely, are distinguishable because the statutory’

‘provisions there held to be too vague or: indefinite

were ‘‘without the specialized content of the word

‘reasonable’ with regard to charges involved in the

determination of rates.’’ (R. 571.) The words

“*just and reasonable”’ or their opposite ‘‘unjust

and unreasonable”’ are repeatedly used in defining

obligations imposed by the Interstate Commerce

Pant ac.

Ruse:

Act. See Sections 1.(5), 1.(6), 1 (11), 1 (12),

15 (1), HARB), 15 (6), 15 (7).

The requirement.that the charges to certain ac-

counts shall be just and reasonable does not give

the Commission the power to ‘‘require recordirg

what the Commission may think should have been

done, instead of what actually occurred.’’ (App.

Br., p. 38.) The real question at issue is whether

form rather than substance shall determine what

‘factually occurred’? and whether the’ company

shall be the final arbiter of this question.

Insistence that accounts shall correspond to the °

substance of the transactions which they record

does not amount to giving the Commission power

to interfere in management. In Kansas City.

Southern Railway Co. v. United States, 231.U. 8.

423, 440, the carrier argued that the authority

to prescribe uniform accounts was confined to regu-

lation of their form and that regulation which dealt

with substance, that is, with the accounting re-

quired ‘in particular circumstances, would consti-

tute unauthorized interference with management.

This Court said (pp. 440-441) :

The very object of a system of accounts is

to display the »ertinent financial operations

of the company, and throw light upon its

present condition. If they are to truly do

this, the form must correspond with the sub-

stance. * * * There is no direct inter-

ference with the internal affairs of the cor-

poration; and if such interference indirectly

Eero — _ eee “ —— ees a

results, it is only such as is incidental to the

lawful control of the carrier by the Federal -

authority * * *,

See also Norfolk d& Western Ry. Co. v. United

States, 287 U. S. 134, 143; Interstate Commerce

Commisston v. Goodrich Transit Co., 224 U.S. 194,

211. -

_ @

THE PROVISIONS GOVERNING CLASSIFICATION OF PHYSI-

CAL PROPERTY ARE NOT ARBITRARY OR UNREASO. -

ABLE

; One of appellants’ grounds of attack is that the

distinction, between accounts 100.1 and 100.3 is so

. indefinite as to be arbitrary. Account 100.1 em-

braces the property ‘‘used in telephone service’”’

and account 100.3 is designated as ‘‘ Property held

for future telephone use.’” (R.123.). The alleged

ambiguity concerns the word ‘‘used’’ in account

100.1 in its relation to ‘‘spare’’ plant, that is, sub-

sidiary parts of a larger unit, such as a cable,

switchboard, underground duct, etc. which may be

temporarily not in use (R. 342,556). We submit

that whatever ambiguity, if any, once existed, has

been dispelled by the evidence presented in this

case. Each of the Commission’s witnesses (except

one, who failed to state his interpretation), includ-

ing the Commission’s chief accountant and its chief

accountant in a telephone investigation undertaken

i pursuant to a Senate ‘Resolution, definitely inter-

, preted account 100.1 as including such spare plant.

#i. ss

<i sa tna a aaa i po acs

(R. 482, 509, 529, 538, 549.) The District Court

‘ likewise made a finding to this effect. (Fg. XVI,

R. 577.)

_ The point stressed by the Commission’s wit-

nesses was that property is used in service, al-

‘ though subsidiary parts thereof are not being used.

to full capacity and that the Commission’s order

does not require any segregation between an oper-

ating unit of property and its component parts.

Appellants (Br., p. 46) refer to the testimony of

the Commission’s chief accountant that account

100.1 would include ‘‘necessary spare plant’’ (R.

482), but this witness placed no special emphasis _

upon the word ‘‘negessary.’’ Moreover, hé stated

that periodical transfers between a: count 100.1 and

account 100.3 ‘‘will not be required by reason of

seasonable changes or fluctuating demands_ for

plaintiffs’ services.’’ (R. 482.)

Appellants suffer no substantial injury by rea-

son of the alleged ambiguity. ~The Commission’s

order, as modified by the decree, allows deprecia-

tion charges against property in account 100.3.

(R. 585.)

Appellants’ other attack upon the classification

of physical property is that the distinction between

accounts 100.3 and 103 is so vague as to be arbi-

trary. Both the 1933 and 1936 Systems of Ac-

counts distinguish between operating and non-

operating property. In the former system, ac-

count 100 includes property used in telephone serv-

ice or ‘‘held under a definite plan’’ for such service

POOR i 8 00 NN PRS ol a rl aad dss iat hein ths hihi ening UO isi ar A EE eit Sy ten a esi nated aS

and account 103 includes all physical property not

covered by account 100. (R. 378-379.) In the

latter system, there are four balance-sheet tele-

phone plant accounts, but only account 100.3, which

applies to property ‘“‘held for imminent use in tele-

phone service under a definite plan for such use’’,

is here material. (R.123.) Account 103 includes

all physical property not included in the balance-

sheet telephone plant accounts. Under both sys-

tems, therefore, property which is not in use or

under construction is not included in telephone

plant unless it is held under a “‘definite plan”’ for °

use in telephone seryice. The 1936 System of Ac-

counts adds the additional qualification that the

property be held acoile ‘Imminent’? use in such

service.

The 1933 system seems defective m classifying

property as operating property merely because it

is held under a definite plan fgr telephone service.

It is highly commendable to plan for future needs,

but all property acquired under such a plan, even

though the plan is definite, is not operating prop-

erty, W hether the test be what would popularly be

regarded as such or what would be included in the

. rate base ina rate proceeding., Whether the Com-

mission, in undertaking to narrow the earlier defi-

| nition, made the wisest possible choice of terms in

adding the requirement as to

immaterial. Appellants have no constitutional

‘‘imminent’’ use is

right to a particular degree of definiteness of mean-

ing in the terms employed to define the contents

67 =

‘of an account. The words ‘‘definite plan’’ are

not without elements of ambiguity. The word

‘imminent’? will acquire precision through inter-

pretation by the Commission. Unless it is improp-

erly assumed that the Commission will be wayward

or inconsistent in its interpretations (see App. Br.,

p. 43), just as great a degree of uniformity will

ensue under these interpretations as if the concept

had been elaborated and expanded in the account

itself.

This Court has used the word ‘‘imminent”’ in de-

fining the line between property which may be in-

cluded in the rate base and that which may not.

Columbus Gas & Fuel Co. v. Public Utilities Com-

mission, 292 U.S. 398. A company which was sell-

ing natural gas to an affiliated company obtainéd its

supply from tracts of land held under lease. It also

held leases on other tracts, some proven and some

not proven, which were not in production but which

represented a source of future supply when its pro-

ducing tracts should be exhausted some three years

or more later. This Court, in discussing which of

these tracts might enter into the rate base in com-

puting a fair return for the service of furnishing

gas to the affiliated company, said (pp. 406~407) :

There will be no need in the computation of

the rate base to include the market or the

book value of. fields not presently in use,

unless the time for using them is so near that

they may be said, at least by analogy, to have

the quality of working capital. * * *

Leases bought with income, the proceeds of

the sale of gas, and thus paid for in last anal-

ysis through the contributions of consumers,

ought not in fairness to be capitalized until

present or imminent need for use as sources

of supply shall have brought them into. the

base upon which profits must be earned. To

capitalize them sooner is to build the rate

structure of the business upon assets held in

idleness to abide the uses of the future.

{Italics supplied.] -

7 39

1F CERTAIN PROVISIONS OF THE COMMISSION'S, ORDER

SHOULD BE HELD INVALID, THE SEPARABILITY OF THE

REMAINING PROVISIONS IS AN ADMINISTRATIVE QUES-

TION WHICH THIS COURT SHOULD NOT DECIDE

Certain of the provisions of the Commission’s

order which appellants attack are clearly severable

from the remainder. The requirements that the

charges to certam accounts shall be just and rea-

sonable is-of this nature. There is also no in-

separable link between the particular classifications

of physical property prescribed by the order and

its other provisi: ss. As to the part of the order

relating to original cost, this is composed of a num+

ber of different provisions assailed on diverse

grounds. There seems no present occasion to dis-

cuss separability from the standpoint of the pos-

sible invalidity of each provision under attack or

any combination of such provisions.

_ ———

é 69 .

To what extent the invalidity of a particular pro-

vision, or particular provisions, of the Commis-

sion’s order would leave such gaps in the system.

of accounts as to render it unworkable is a question

ealling for the exercise of administrative judgment.

The situation is somewhat different when a court

declares the invalidity of certain provisions of a

statute. If it merely strikes down the invalid pro-

visions, those charged with enforcement of the

statute will be under a duty to carry out the re-

mainder. There is thus presented a question of

statutory interpretation which it may be proper

for the court to determine, namely, whether the

legislative body did or did not intend that the valid

provisions should remain effective notwithstanding

the failure of those found to be invalid. |

In the case of an administrative order such as is

now before the Court, a decision limited to the hold-

ing that particular provisions are invalid leaves the

regulatory body free to decide the question of sep- 3

arability in the light of its specialized knowledge of

the administrative problems involved. The Com-

munications Commission has no desire to put into

effect an incomplete or inconsistent system of uni-

form accounts. What it does desire is that it should

be permitted to decide in the first instance what

does or does not constitute an incomplete or incon-

sistent system. We submit that the Court’ should

not proceed on the assumption that the Commission

will be wanting in a due regard for its responsibili-

ties and duties or in the ca acity to perform them.

ee eee

70.

CONCLUSION

It is respectfully submitted that the decree of the

District Court should be affirmed.

STANLEY REED,

Solicitor General,

JOHN DICKINSON,

j | Assistant Attorney General. ~*~

CHARLES H. WEsTON,

Special Assistant to the Attorney General.

NOVEMBER, 1936.

SS a rn a

BRE INSERM. Re eend theo we ¥ oe

wegcn ie gaat Sos PA » *.

Peart ate Seanad Bie

APPENDIX

The Act of June 19, 1934, 48 Stat. 1064 (U.S. C.,

Title 47, Secs. 151 et seq.), provides inter alia:

Src. 3. For the purpose of this Act, unless

the context otherwise requires—

* * * * *

(h) ‘Common carrier’, or ‘‘carrier”’

means any person engaged as a common car-

rier for hire, in interstate or foreign com-

munication by wire or radio or in interstate

or foreign radio transmission of energy, ex-

cept where reference is made to common

carriers not subject to this Act; but a person

engaged in radio broadcasting shall not, in-

sofar as such a person is so engaged, be

deemed a common carrier.

* * * * *

Sec. 205. (a) Whenever, after full oppor-

tunity for hearing, upon a complaint. or

under an order for investigation and hear-

ing made by the Commission on its own in-

itiative, the Commission shall be of opinion

that any charge, classification, regulation, or

practice of any carrier or carriers i8 or will

be in violation of any of the provisions of

this Act, the Commission is authorized and

empowered to determine and prescribe what

will be the just and reasonable charge or the

maximum or minimum, or maximum and

minimum, charge or charges to be thereafter

served, and what classification, regulation,

practice is or will be just, fair, and rea-

sonable, to be thereafter followed, and to

(71)

, d |

72 - |

make an order that the carrier or carriers

shall cease and desist from such violation

to the extent that the Commission finds that

the same does or will exist, * *

* + * * _

Sec. 213. (a) The Commission may from

~ time to time, as may be necessary for the

proper administration of this Act, and after

opportunity for hearing, make a valuation

of all or of any part of the property owned .

or used by any carrier subject to this Act, as

of such date as the Commission may fix.

7 * * * *

require any such carrier to file with the Com-

mission a statement showing the ofiginal

cost at the time of dedication to the public

use of all or of any part of. the property

owned or used by said carrier. *

* * 2 * -

Sec. 214. (a) No carrier shall undertake

the construction of a new line or of an exten-

sion of any line, or shall acquire or operate

any line, or exiension thereof, or shall en-

gage in transmission over or by means of

such additional or extended line, unless and

until there shall first have been obtained

from the-Commission a certificate that the

present or-future public convenience and

necessity require or will require the con-

struction, or operation, or construction and.

_operation, of such additional or extended .

line * * *,

. * 7 - *

Sec. 221. (a) Upon appiication of one or

more telephone companies for authority to

consolidate their properties or a part thereof

into a single company, or for authority for

_———————

73° »

one or more such companies to acquire the

whole or any part of the property of another

telephone company or other telephone com-

panies-or the control thereof by the purchase

of securities or by lease or in any other like

manner, when such consolidated company

would be subject to this Act, the Commis-

sion shall fix a time and place for a public

hearing upon such application * * *.

After such public hearing, if the Commis-

sion finds that the proposed consolidation,

acquisition, or control will be of advantage

to the-persons to whom service is to be ren- ~

dered and in the public interést, it shall cer-

tify to that effect ; and thereupon any Act or

Acts of Congress making the proposed trans-

action unlawful shall not apply. * * *

+ *

id + *

Sec. 402. (a) The provisions of the Act of

October 22, 1913 (38 Stat. 219), relating to

the enforcing or setting aside of the orders

of the Interstate Commerce Commission,

are hereby made applicable to suits to en-

force, enjoin, set aside, annul, or suspend

any order of the Commission under this

Act * * *, and such suits are hereby au-

thorized to be brought as provided in that

Act.

° * 7 * .

Sec. 501. Any person who willfully and

knowingly does or causes or suffers to be

done any act, matter, or thing, in this Act

+ prohibited or declared to be unlawful, or

who willfully and knowingly omits or fails

to do any act, matter, or thing in this Act

required to be done, or willfully and know-

ingly causes or suffers such omission or

failure, shall, upon conviction thereof, be

punished for such: offense, for which no

sestbinaduitsatah 5 ie lS A aR nt Ai Se i RBIS a EN a hie hat MN a OF ae

penalty (other than a forfeiture) is pro-

vided herein, by a fine of not more than

$10,000 or by imprisonment for a term of

not more than two years, or ‘both.

Sec. 502. Any person who willfully and

knowingly violates any rule, regulation, re-

. striction, or condition made or imposed by

the Commission under authority of this

Act, * * * shall, in addition to any other —

penalties provided by law, be punished,

upon conviction thereof, by a fine of not

more than $500 for each and every day dur-

ing which such offense occurs.

* * * * *

Sec. 504. The forfeitures provided for in

this Act shall be payable into the Treasury.

of the United States, and shall be recover-

able in a civil suit in the name of the United

aa, © 7 =,

U.S GOVERNMENT PRINTING OFFICK: 1936

yb ee Die a ee ee at Th

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.