# Brief of Appellants — American Telephone & Telegraph Co. v. United States > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386010_0087%3A07 ## Record - **Collection:** Supreme Court brief - **Document type:** Brief of Appellants - **Published:** January 1, 1936 - **Citation:** 299 U.S. 232 ## Text eR ncncncnsndscnccencsansticaobetbtsteasenansaauen PETER, o cnennssenccdansunsnncbsaggadessinatntansanenen I. The original cost provisions of the Uniform System of “ Accounts for Telephone Companies, prescribed by the Federal Communications Commission, are not (a) The original cost provisions do not require the appellants to keep their property invest- ment accounts so as to misrepresent their investment in property...........------- (b) The original cost provisions do not prevent the appellants from charging any depreciation © expense on a part of their actual investment in depreciable property.....----.-------- (c) The original cost provisi do not require, in effect, a retroactive change in the accounts of transactions entered into by appellants, whether with or without governmental approval in diahenapitiehapiniedeencntaaanasinediacacid: (d) The original cost provisions are not unreason- ably burdensome and expensive, and they serve a useful purpose in addition to the recording of information which could be made available in supplementary state- ments pursuant to Section 213 (c) of the Communications Act of 1934_.______.__- II. The provisions of Telephone Division Order No. 7—C 2 (paragraph (C) of the text of account 100.4, “Tele- phone plant acquisition adjustment’’) that (R. 124): “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 amorti- zation thereof in such manner as this Commission Sle GS GIO GIR Tin kcrctincctsacnsdtonasenan III. Instruction 2 (B.1) of the Order assailed “ the ap- pellants is not, in its requirement, so arbitrary and unreasonable as tobe beyond the authority of the Federal Communications Commission to prescribe, and it does not deprive the appellants of their rights under the Due Process Clause of the Fifth Amend- ment to the Constitution of the United States-_--- 103991361 a) 14 27 28 31 42 i Argument—Continued. Page III. Instruction 2 (B. 1)—Continued. (a) The instruction is not contrary to the funda- mental principles of correct accounting, and it would not compel a falsification of the accounts of the appellants_______.-_-_- ‘62 (b) The instruction does not lay down a rule of accounting, to which appellants must con- form on pain of the statutory penalties, so vague and indefinite as not to constitute R a legal standard of conduct__-_-_-__------- 63 IV. Order No. 7-C of the Telephone Division of the Fed- eral Communications Commission does not, with respect to investments in items of property to be entered respectively in accounts 100.1, 100.3 and 103, lay down rules of accounting ‘so vague and in- definite as not to constitute a legal standard of conduct under applicable provisions of law, and the referable instructions in said Order are not arbitrary, and they do not deprive the appellants of their rights = - under the Due Process Clause of the Fifth Amend- ment to the Constitution of the United States__-_-.. 67 V. The provisions of Order No. 7-C of the Telephone Division of the Federal Communications Commis- sion, challenged by the defendants, are separable from the other provisions of the Order; and the Order, as a whole, is not void because of any illegality of any of its provisions- ~_...-_----- cha id eacaaoiin 74 Ns ac ocaed coe eta bacandwadse Rapan nee mnem les aie 76 CITATIONS Cases: Arkansas Natural Gas Co. v. Arkansas Railroad Commission OR RE pre Peas... Sereeane Sepp 72 Atlanta, Birmingham & Coast R. R. Co. v. U. S. (1935), SI is I ea ira ad Niece sk ak dace ks sc ecard a eee 54 Borden’s Farm Products Co., Inc. v. Baldwin, 293 U. 8. 194- 11 Chesapeake and Ohio Ry. Co. v. United States,5 F.Supp.7--- 7,8 Cateas, &. & ©. B. Oe, 106 5. C.. GC. ba nancnccscscesscas 69 “Chicago, Burlington & Quincy R. R. Co. v. McGuire, 219 Eres Sa A hee ree ie rhe) oe a ta 11 Chicago & Grand Trunk Ry. Co. v. Wellman, 143 U.S. 339,- 9, 10 Chicago and J]. W. R., 149 I. C. C. SER RPT RRS LES 69 Cline v. Frink Dairy Cen es cee naheuee so 63, 64 Connally v. General Construction Co., 269 U. 8. 385_------ 63, 64 Groesbeck, et al. v. Duluth, South Shore ¢ Allantic Ry. Co., Ss EN cae ak oso dat ak ei oie dd ha oumabaa een 56, 57 , feibtlai ake ee ee ns il Cases—Continued. Page Interstate Commerce Commission v. Alabama Midland Ry. ee eek incon cc nue Shnacbaabeonaa ; 58 Interstate Commerce Commission v. Goodrich Transit Co’ 224 U. 8. 104...__.. Luetctasivesbidkeveknchassaluda " 30, 64 Interstate Commerce ee v. Illinois Central R. R. Oe Sr ere eee 2,3 In the Matter of the I iuidiceaes and Suspension of Advances , in Rateg for the Transportation of Coal by the Chesapeake & Ohio Ry. Co. and othér carriers; XXII I. C. C. 604___. 57, 58 Kansas City Southern Ry. Co. v. United States, et al., 281 eg RN a Oe apes 5, 6, 7, 18, 19, 30, 36, 64, 65, 75 Knights Templars’ and Masons’ Life Indemnity Co. vy. ST re OE So 0 kh nel ne a bobs ws nedsebone 72 Lehigh Valley R. Co. v. United States, 234 Fed. 682; 243 Ee oe dine lon Nene in neds nen eeele 9 Los Angeles Gas and Electric Corp. v. Railroad Commission of the State of California, 289 U. S. 287...___.__..... 8 «New York C. & H. R. Ca. v. United States, 212 U.S. 481. 72 New York Central R. Co., 27 Val. Rep. 1________- ba 70 New York Edison Co., et al. v. Maltbie, et al, 244 A. D. (N. Y.) 685; 281 N. Y. Supp. DC kind cach amneese abe 24, 25, 42 Norfolk and Western. Ry. Co. v. United States, et al., 287 U. 8. Re ee ee eae no ken kd same 3, 4, 5, 20, 22, 23, 36, 37 Pacific States Box & Basket Co. v. White, et al., 296 U. 8. NEES pap hn pop AT Pe ae pl ee ee ee ‘ 12 Pennsylvania Co. v, United States, 236 U. S. 331___....__- 58 Penneyleania BR. Co., 22 Val. Rep. 1... .......-..-.cccce. 69 Pennsylvania PR. R. Co. v. International Coal arene Co., 230 A te FOE. AP hn Ey Sa eee 58 Philadelphia & R. Ry. Co. eal. v. Interstate Commerce Com- en ee rn ang ek necked nace oaee . 58 Pittsburgh C. C. & St. L. Ry. Co., 24 Val. Rep. 1_...._._ 58, 59 Small Co..v. American Sugar Refining Co., 267 U. S. 233_. 63 St.. Joseph Stock Yards Co. v. United States and the ¢ Secretary Of Agricuijure, 306 U.S. 3... 2... 2... cccnee 8,9 Standard Oil Co. v. United enens; Get UG. 4... ecccce 58 Tedrow v. Lewis & Son Co., 255 U. S. 98.__________. ene 63 Zeeme MeGena &. &., 76 i. ©. ©. 1... 23. 8.5. nec ccccce 69, 72 Tri-State Tel. & Tel. Co. Proposed Control, 180 I. C..C. 229. 38 Tri-State Tel. & Tel. Co. Control, 193 I. C. C. 383_______- 38 United States v. American Tobacco Co., 221 U.S. 106... _. 38 United States v. Atlanta B. & C. Ry. Co., 282 U.S.522_ 36, 37, 38, 54 United States v. Cohen Grocery Co., 255 U: 8. 81__-__...-- 63 United States, et al. v. Missouri Pac. R. R. Co., 278 U. 8. 269. 31 Virginian Ry. Co., 1411. C. C. 595...........-----..... 69 West Ohio Gas Co. v. Public Utilities Commission of Ohio, 204 AI eee eee eto Sian duiincwietd abana 75, 7 IV Statutes: Page Act to Regulate Commerce (49 U. 8S. C., Chap. 1; 41 Stat. 474); Sections 1 (4), 1 (5), 1 (6), 1 (8), 1 (11), 1 (12), 1 (15) (b), 1 (16), 1 (17), 1 (21), 3 (1), 3 (4), 4, 5 (1), 5 (2), Ff SS FS FS fe ee 57 - Communications Act of 1934. -.................:-...-. . 18, 64 RS Sinnddheedenéensdscdetsaepesasbneanénanns 37 PS Mn ddiewascasnacanscantssoncennssacauaned 37 RE iccicoenssestessdosandsdadesstnnnne 35, 36, 37 I ee 31,.33, 34, 35, 38 SS SP Os wccusncccasnddncascdusdctensbeban 37 IN TE Gk cacadasencednsscdéscedbenssasause 37 BE Bit bccnnnadccnsdacsscosussenesseesqueneee 2, 36 Section 220 (a).......--- 29, 33, 34, 35, 36, 37, 38, 56, 65, 74 IE ee Give nencddnscchnsacnsinsondinunin 37, 44, 45 SN BD iainncndecncctacsnpecnsesaiessasens 60 OO RE ey a 60, 65 Constitution of the United fates of America: Sy Sc nidnnassonsedednnaehenianmes 56, 67 Re IND Pi wcccengensnscsnnnsessensonuns 37, 64 Dt Sl bk6 detnbend ebecudandaaseennaeans 36 Section 16 (@) 2.222.220 cccccccescccceccnsceces 36 ee 36 BE littiveniéccdcuecxtsiedcdsnnntaneneananiia 2, 36. TE Ee Ge 0 Giinencasadepennsnecccssannanenan 36, 65 SE Se OP OP Cine cndsncnsccdccedansencsecins 36, 65 ST BR cctindndencndscectsmbsocsdtminnnthneaiaasene 63, 64 Urgent Deficiencies Aperopsiations Act (28 U. 8. C., Sec. 43-8; 38 Stat. , Chap. Se Sk SP intnadnetnmandaas 10 Authorities: “The Accounting Review’’ (June issue), p. 188._...-.---- 49 “Railroad Finance and Organization’, by William Z. Se, 0, Sb nndiatinncbaccsansbbsensantoneagne - 39 Sharfman, The Interstate Commerce Commission, Vol. Eee, COREE, BO. BES OE Gi cwccstcncccceacsesatses 39 Whitten on “Valuation of Public Service Corporations”, O8 o6, Gbttias GEE Ph BR wcccnccecccancsecesescces 48 Inthe Supreme Gourt of the Wnited States OcroBeR TERM 1936 No. 74 AMERICAN TELEPHONE AND TELEGRAPH COMPANY ET AL., APPELLANTS Vv. THE UNITED STATES OF AMERICA, FEDERAL CoM- MUNICATIONS COMMISSION AND NaTIONAL Asso- CIATION OF RatLRoaD AND UTILITIES CoMMIs- SIONERS — BRIEF FOR FEDERAL COMMUNICATIONS COMMISSION STATEMENT An adequate statement of the case appears in other briefs, and for this reason we have not in- cluded a general statement herein. The outline of this brief follows generally the topical /arrangement suggested by appellants in their Statement of Points (R. 600); and against propositions advanced in said statement, Federal Communications Commission presents the follow- ing: ? (1) 2 ARGUMENT I THE ORIGINAL Cost PROVISIONS OF THE UNIFORM SyYsTtEM OF AccouNTS FOR TELEPHONE Com- PANIES, PRESCRIBED BY THE FEDERAL COMMUNI- CATIONS CoMMISsSION, ARE Not Voip The Uniform System of Accounts assailed in this:suit was established by the Federal Com- munications Commission under authority of Sec- tion 220 of the Communications Act of 1934, which is comparable with Section 20. of the Interstate Commerce Act. The appellants, in the trial court, challenged the validity of the system of accounts on three general grounds; (1) Violation of their constitutional rights, (2) want of conformity to statutory au- thority, and (3) such unreasonable and arbitrary exercise of power as to transcend authority con- ferred. Decisions of the Supreme Court clearly show the powers exercised by the court in deciding is- sues founded upon the three grounds above stated. In Interstate Commeree Commission v, Illinois . Central Railroad Co., 215.U. 8. 452, 470, which involved the amenability of the [Illinois Central Railroad Company to an order of the Interstate Commerce Commission regulating the distribu-. tion of coal cars during periods of car shortages, a RS " " te Lincs inhale A NILA Na Elian ies g Shatin Sit Nc ie 4, ) » am ewe Faas iio 3 the court, after on the grounds for 5 cai interference, said: ; Plain as it is that the powers just stated are of the essence of judicial authority, and which, therefore, may not be curtailed, and whose discharge may not be by us in a proper case avoided, it is equally plain that such perennial powers lend no support whatever to the proposition that “we may, under thepguise of exerting judicial power, usurp merely administrative functions by setting aside a lawful administrative order upon our conception as’to whether the adminis- trative power has been wisely exercised. In Norfolk and Western Railway Co. v. United States et al., 287 U. 8. 134, on an appeal from a decree of a district court dismissing a petition to enjoin the enforcement of provisions of an order of the Interstate Commerce Commission which re- quired the appellant to keep its accounts in accord- ance with the prescribed system of accounts ap- plicable to issues therein raised, this court, among other things, said: 7 The Commission’s order is challenged as in excess of the statutory grant of power. The concession is made that Section 20 of the Act grants a discretion to prescribe a uniform system of accounts, the manner in which they shall be kept, and the forms thereof. The“appellant, however, asserts : that this discretion is limited by the pur- a Aha EN Sp gg SE EET 4 poses and ends for which such accounts are to be kept, as exhibited in other sections of the Act. * * * (ad., p. 1388-9). * * * i * * With great earnestness the appellant characterizes the order as in several aspects a denial of due process. It declares that by virtue of the Commission’s mandate an un- fair and improper rate base is fixed, and a capital asset properly to be taken into account for purposes of recapture is elim- inated. But this is to ignore the’ fact that the order is one touching accounting merely ; that before any rate base can be ascertained or any basis of recapture determined the earrier Will be entitled to a full hearing as to what property shall be included; and not until the Commission excludes the assets in question from the calculation may the earrier assert the infliction of injury to its rights of property. * * * (id.,p. 141). # * * _ * * a In the same case in the lower court, reported in 02 F. (2d) 967, 970, the court said: * * * The Commission is vested by Congress with full power and authority to require reports from carriers and to pre- scribe the form of the accounts which they shall keep. * * * What thesa forms shail be, and what items shall be allocated under particular subdivisions thereof, are obviously matters which must rest in the discretion of the commission; and the courts will not interfere with the exercise of that Rigeiudiy -of~>- discretion, unless such exercise is so mant- festly arbitrary and unreasonable as to transcend the commission’s powers: [Ital- - ies supplied. ] : The Federal Communications Commission had authority to prescribe the Uniform System of Ac- counts, and the order promulgating the System is immune from annulment unless it be found to be so manifestly arbitrary and unreasonable as to - transcend the powers of the Commission—and, not then, unless it injuriously affects property rights. This statement is well supported in cases here- tofore cited, furthermore: : In Kansas City Southern Railway Co. v. United States et al., 231 U. S. 423, counsel for said railway company made all the objections against the order involved there that are made in the case at bar. Mr. Justice Pitney, speaking for the court, began the statement of the case as follows (p. 487): The contention of appellant in the Com- merce Court and in this court is that the regulations of the Interstate Commerce Commission relative.to the method of keep- ing the accounts of common carriers, so far as they are here questioned, are unreason- able, beyond the power or authority of either Congress or the Commission, and violative of the Fifth Article of Amendments to the Constitution of the United States, as being a deprivation of property without due process of law. * * *° — te * aa Z. e Ad A 5 s& £ * i z % é ? 2. % . . 24, AEE ADIN MIE Er LRG LN EGY PET Ee LENORE INE EE GN OS OI EY ET PEER ‘ x Css y i 6 The following matter appears in the course of the opinion (7d., p. 441): * * * * There is no direct. interfer- ence with the internal affairs of the corpo- ration; and if any such interference indi- rectly results, it is only such as is incidental to the lawful control of the carrier by the Federal authority and to this the rights of stockholders and bondholders alike are nec- essarily subject. The court, discussing another feature of the case; said (id., p. 449-50) : It is insisted that if the appellant, hay- ing expended in round figures $600,000, ~ secured by the sale of bonds for improve- ments, can be compelled to charge $400,000 of that amount tu .:e operating expense of one year or to distribute it among the oper- ating expenses of a series of years, and if it be forbidden to keep any other record rep- resenting the transaction, it will have in its possession no kind of record, from which it can report accurately either the cost of its property or the cost of improvements or its } operating expenses. This, we think, is a misapprehension of the effect of the regu- lations. They do not require appellant to falsify its books or to change in any way the evidential character of the original entries. The source of the money, and the disposi- tion made of it as expended, may and should be correctly shown. The regulations do re- quire that the contemporaneous abandon- ON ho ie tld NADA NGC a BS OS RTE EN Ree i rrr ad maaan 7 ment of other property be hkewise shown, and the replacement cost, less salvage, charged to the appropriate accounts under operating expenses. This, if observed, of course results in enforcing a presertbed dis- tinction between capital expense and oper- ating expense. It does not require that the record of the expenditure be obliterated ; but it does of course affect the results as they work out upon the balance aheet. * * * Continuing, the court also said (7d., p. 456-7) : It is further insisted that even the theory upon which the accounting regulations rest does not, when analyzed, justify a charge of abandoned property to operating expenses, but at most a charge to profit and loss. ‘The suggestion apparently has force; but, upon consideration, we are unable .to see. that it furnishes ground for judicial inter- ference with-the course pursued’ by the Jommission. * * * But, did we agree with appellant that the abandonments ought to be charged to sur- plus or to profit and loss, rather than to operating expenses, we still should not deem this a sufficient ground to declare that the Commission had abused its power. So:long as it acts fairly and reasonably within the : grant of power constitutionally conferred . by Congress, its orders are not open to judicial review. In Chesapeake and Ohio Railway Company V. United States et al., 5 F. Supp. 7, a three-judge se i NE IB NG St Ss 0 nt eae reins ai eth et ti até etemewti-n gets oe cease, Eastern Distriet, Virginia, the court held (5th syllabus) : Accounting methods prescribed by Inter- state Commerce Commission for rail car- riers cannot be interfered with by court ex- cept on showing that they are so entirely op- posed to fundamental principles of correct accounting as to manifest abuse of power. (Interstate Commerce Act, Section 21 (1, 5), as amended, 49 U. S. C. A. Section 21 (1, 5).) The act of prescribing a system of accaunts is legislative; and the courts have only limited au- thority, if any, to enjoin a system of accounts. The extent of judicial review of an ‘act within legislative range is well described in St. Joseph Stock Yards Company v. United States andthe Secretary of Agriculture, decided by the Supreme Court on April 27, 1936, 298 U. 8S. 38, 51, wherein the court said: * * * The court does not sit as a board of revision to substitute its judgment for that of the legislature or its agents as to - © matters within the province of either. San Diego Land & Town Co. v. Jasper, 189 U.S. 439, 446; Minnesota Rate Cases, 230 U.S. 352, 433; Los Angeles Gas Co. v. Railroad Commission, 289 U.S. 287, 304. When the legislature itself acts within the broad field of legislative discretion, its determinations are conclusive. When the legislature ap- points an agent to act within that sphere of legislative authority, it may endow the . 5 ate A bee mein ee Rete ne ee en ee ee alecibse A hat v ° o agent with power to make findings of fact which are conclusive, provided the require- ments of due process which are specially applicable to such an agency are met, as in according a fair héaring and acting upon evidence and not arbitrarily. The limited authority of the courts in a suit to enjoin a commission order is very well illustrated in Lehigh Valley R. Co. v. United States, 234 Fed. 682, affirmed in 243 U. S. 412. The court, address- ing itself to the question present, and speaking of the Interstate Commerce Commission in connection with its order there under consideration, said (p. 697) : * * * its right to judge depends on the statute, and the statute in terms gives it the right to inquire and determine whether a given situation presents a case * * *. In spite of the statutory declaration of final- ity, the courts still retain a limited power of supervision—enough to see that con- | stitutional requirements have been ob- served. * * * The limited power there mentioned describes the. authority of the court in the suit under considera- | tion. The samé ‘ame is fully expressed in Chicago & Grand Trunk Railway Company v. Wellman, 143 U. S. 339, 344-5, wherein Mr. Justice Brewer, speaking for the court, said: * * * The theory upon which, appar- ently, this suit was brought is that parties 10 have an appeal from the legislature to the _ courts; and that the latter are given an im- mediate and general supervision of the con- _stitutionality of the acts of the former. Such - is not true. Whenever, in pursuance of an honest and actual antagonistic assertion of rights by one individual against another, there is presented a question involving the validity of any act of any legislature, State or Federal, and the decision necessarily rests on the competency of the legislature to so enact, the court must, in the exercise of its solemn duties determine whether the act be constitutional or not; but such an exer-. cise of power is the ultimate and supreme function of courts. It is legitimate only in the last resort, and as a necessity wn the determination of real, earnest, and vital controversy between individuals. * * * [Italics supplied. ] The pertinent provisions of the Urgent Defi- ciencies Appropriations Act (28 U.S. C., Sec. 43-8; 38 Stat., Chap. 32, pp. 219-20), under which the suit was tried, indicate that said Act establishes no new remedy for testing the validity of orders of commissions. The purpose of the Act mentioned appears to be to define more clearly the manner in which the Federal Equity Courts shall exercise powers vested in them under the Constitution and laws of the United States. The aforesaid Act does not enable said courts to apply any remedy, nor to grant any aes Sill naa Ris Sansa aa, 1 Ze Heh bck Da 50 eae A me let li lh 11 relief, different from that previously authorized in any ordinary Equity proceeding in such courts. In Chicago, Burlington & Quincy R. R. Co. v. McGuire, 219 U.S. 549, 569, it was said: * * * The scope of judicial inquiry in deciding the question of power is not to be confused with the scope of legislative con- siderations in dealing with the matter of policy.. Whether the enactment is wise or unwise, whether it is based on sound eco- nomic theory, whether it is the best means to achieve the desired result, whether, in short, the legislative discretion within its prescribed limits should be exercised in a . particular manner, are matters for the judg- ment of the legislature, and the earnest con- m flict of serious opinion does not suffice to ' bring them within the range of judicial cognizance. In Borden’s ‘Farm Products Company, Ine, Vv. Baldwin, 293 U.S. 194, 209, the court said: When the classification made by the legis- lature is called in question, if any state of facts reasonably can be conceived that would sustain it, there is a presumption of the existence of that state of facts, and one who assails the classification must carry the bur- n of showing by a resort to common knowledge or other matters which may be judicially noticed, or to other legitimate proof, that the action is arbitrary. The presumption mentioned is as applicable to administrative orders as to strictly legislative eg a ee re ee ee ce a enactments. See Pacific States Box & Basket Company v. White, et al., 296 U. S. 176, 185. The statement of the trial court respecting the original cost provisions of the Uniform System of Accounts is clear and concise. We could not improve the statement. . Argument to sustain it inheres in it. No amplification is needed. That court, among other things, said (R. 566): The requirement that original cost be set forth in accounting records of the telephone companies serves to complete ‘the picture of value in revealing the property’s financial background and showing the relationship of a carrier’s monetary return to the original as well as to its own investment. It aids the Commission in its duty to determine from all the pertinent circumstances and factors, the just and reasonable rates which the carrier may exact from its service. Original cost is a relevant factor. Smyth v. Ames, 169 U. S. 466, 547; Los Angeles Co. v. R. R. Comm., 289 U. 8. 287, 306, ef. Sec. 213 (a) of the Act. The object of the _ system of accounts might weil be to display the pertinent financial operation and throw light upon its present condition. Kansas City Southern Ry. v. U. S., supra, at p. 440. Original cost as a segregated item on a bal- ‘ance sheet may serve to reveal actualities which may be pertinent in fixing a rate base on the capitalized earning power of a prop- erty purchased. In making readily avail- able facts which tend to expose discrepancies (a ms saab ahaa saan teasebagadte seniaiiasiaeinmeennens 13 in valuation, it cannot be said the system is so arbitrary as to be beyond the Commis- sion’s power. Forty-seven state public utility bodies acquiesce in the proposed réquirements. This is not evidence of unreasonableness. The reasons underlying the original cost provi- sions of the Uniform System of Accounts under stay were clearly and concisely. stated by Mr. W. J. Norfleet, Chief Accountant of the Federal Com- munications Commission, in his affidavit. See quotation on p. 32 of this brief, and for same man ter see R. 470, last paragraph. For findings and conclusions sustaining gener- ally the defense of the Federal Communications Commission, appellee herein, see ‘“‘Findings of Fact’’, I to XXI (R. 573-8), and ‘‘Conclusions of Law’’, I to XV (R. 578-83). For testimony on behalf of the Federal Com- munications Commission, defendant below—ap- pellee here, see affidavits of William J. Norfleet (R. 468-484) ; Robert S. Rains (R. 484-492-500) ; John H. Bickley (R. 500-523); Asel R. Colbert (R. 523-531) ; Maleolm F. Orton (R. 531-544) ; and Charles W. Smith (R. 544-552). The District Court did not err in holding the original cost provisions valid. 2 103991—36——2 - (a) THE ORIGINAL COST PROVISIONS DO NOT REQUIRE “THE APPELLANTS TO KEEP THEIR PROPERTY INVEST- _MENT ACCOUNTS SO AS TO MISREPRESENT THEIR INVESTMENT IN PROPERTY Appellants’ telephone plants are either con- structed by them, or are acquired by donation, pur- chase, consolidation, or merger. If telephone plant is constructed by appellants, the following instruction in the Uniform System of Accounts, under stay pending this appeal (R. 109), enumerates the items of cost includible in’. their investment accounts: 22. Cost of construction—(A) The cost of construction of property chargeable to the telephone plant accounts shall include the cost of labor, material and supplies, transportation, contract work, relief and pensions, protection, injuries and damages, privileges and permits, taxes, special ma- chine service, interest during construction, insurance, construction services, and other analogous elements in connection with such work. | If telephone plant is donated to appellants, in- struction 20 (B) of the Uniform System of Ac- counts (R. 107-8) provides: Telephone plant contributed to the com- pany.or constructed by it through expendi- tures of contributions of money or its equiv- (14) : we s - ce Sa tye pgs ss fn amr Re itd ls thas aeed San eh a Ad a Ment Sin he aint bteie Lk Busts es th Be . s Son aes WS Fe a a Sa ePR Naa ge wee getgs cal “ D Ps ebesaba baie LES Be we th pean ch Bie sir. POG Rhone mt oR eS EOL BA SIRS NR ala 15 alent shall be charged to the telephone plant accounts at its original cost (estimated if not known) and there shall be credited to _ the depreciation. reserve and amortization reserve accounts the estimated amounts of the ‘reserve requirements, if any, appli- cable to the plant. The difference between the amounts so includible in the telephone plant and the reserve accounts shall be cred- ited to account 175, ‘‘Contributions of tele- phone plant.”’ , If telephone plant is acquired by purchase, con- solidation, or merger, instruction 21 (A) of the Uniform System of Accounts (R. 108) applies, to ‘wit: . When property in use in telephone service (note instruction 3-AA) is acquired, the amount of money actually paid (or the cur- rent money: value of any consideration other than money exchanged) for the property (together with preliminary expenses in- curred in connection with the acquisition) shall be charged to account 276, ‘‘Telephone plant acquired.’’ (Note also account 139.) Amounts are then determined with respect to the acquired property representing : | (1) Original cost of plant in service. (2) Original cost of plant under construction. (3) Original cost of property held for future telephone use. | (4) Depreciation and amortization applicable to the acquired property. (5) Balance of purchase price. 16 The amount of item (1) is distributed among _ the telephone plant accounts, the total of which is included in the balance sheet in investment account 100.1, ‘‘Telephone plant in service’? (R. 122-3). The amounts of items (2) and (3) are included in the balance sheet in investment accounts 100.2, ‘Telephone plant under construction’’, and 100.3, ‘*Property held for future telephone use’’, respec- tively (R. 123). The amount of item (4) is included in the bal- ance sheet in accounts 171, ‘‘ Depreciation reserve’’, and 172, ‘‘Amortization reserve’’, as appropriate (R. 140). The amount of item (5) is included in the bal- ance sheet in investment account 100.4, ** Telephone plant acquisition adjustment’’ (R. 123). Ih paragraph (1), provision (B), under instrue- tion 21 (R. 108), reference is made to telephone plant accounts and to items to be charged thereto. The list of telephone plant accounts is found in the Uniform System of Accounts at page 47 (R. 143), and are numbered 201 to 277. The accounting prescribed by the aforesaid in- struction 21 will result in showing in the accounts and records of carriers the following information with respect to property acquired from another utility: | 1. The cost of the property to the accounting company. 17 2. The original cost (as defined in instruction 3 (S.1) of the Uniform System of Accounts) of the telephone plant, governmental franchises, and other similar rights acquired. 3. The amounts of depreciation and amortiza- ‘tion applicable to the property. 4. The original cost of telephone plant under construction at date of purchase. _ 5. The original cost of property held for future telephone use acquired ‘in the transactiorm 6. The difference between (a) the amount of item (1) and (b) the net amount of items (2) to (5), inclusive; segregated and shown separately in investment account 100.4, ‘‘Telephone plant acquisition adjustment.’’ (See affidavit of Mr. W. J. Norfleet (R. 474-5).) Instruction 21 of the system of accounts under stay pending this appeal (R. 108-9), and instruc- tion 21 of the system herctofore and now in effect (R. 365-6), show that the accounts and records to — be kept under this Commission’s system for tele- phone plant purchased will disclose not only the | essential information reflected in the accounts and records as kept under the present system, but will also make readily available the record of original cost of telephone plant in service at date of the balance sheet. Furthermore, instruction 2 of the Uniform System of Accounts (R. 97), issued by the Federal 18 Communications Commission on June 19, 1935, provides : Ss 2. Records —(A) The company’s — rec- ords shalt be kept -with sufficient particu- larity to show fully the facts pertaining to’ all entries in these accounts. Where the full information is not recorded in the gen- eral books the entries therein shall be supported by other records in which the full details shall be shown and the general book entries shall contain sufficient reference to the detail records to permit ready identifi- cation. ‘The detail records shall be filed in such manner as to be readily accessible for examination by representatives of this Commission. ; The purpese of instruction 2 of the Uniform System of Accounts is to prevent concealment and misrepresentation, and under instruction 21 there- of all carriers subject to the Communications Act of 1934 are required to include in the balance sheet, as well as in the journals amd other records of the companies, any cost representing the investment of the reporting company as distinguished from the original cost to the first owner or dedicator. —— In this case, the appellants are much like the apyellant in Kansas City Southern Ry. Co. v. United States, ct al., 231 U. 8S. 423, 449, where the. court spoke of appellant’s ‘‘misapprehension of the effect of the regulations,’’ and further said of the regulations: bie 19 * * * They do not require appellant to. falsify its books or to change in any way the evidential character of the original en-’ ia FO In reading a balance sheet, or the accounts of a oss =e i oedema company, to determine the facts concerning a par- — ticular item, several accounts must often be com- ‘bined. A separation of the accounts, for the pur- pose of more accurately indicating the character of the items included therein, is not only reasonable, but is essential, and does not in any way impair the integrity of the balance sheet showing. The mere matter of increasing or decreasing the num- ber of balance sheet accounts may not turn on legal grounds. i | Amounts included in account 100.4, ‘‘ Telephone plant acquisition adjustment’’, may represent, un- der differing circumstances, a portion of the amounts paid for various and sundry tangible and intangible items. However, these amounts do not, as implied by appellants and additional appellants, represent, in all instances, a portion of the car- rier’s investment in physical properties or in franchises, patent rights, and similar intangible rights acquired, the original costs of which are in- cludible in the telephone plant accounts. Some amounts included in account 100.4 should not, in all instances and without variation, be subject to. depreciation or amortization accounting. Such amounts may be (but admittedly not always are) ee ee eee 20 ~ the result of watering, writing-up, or unwarranted elimination of competition. If these amounts, necessarily subject to scrutiny, can be set out separately without violation of any essential ac- counting principle (and they can be), the regula- tory body in the exercise of due diligence should require such appropriate segregation. In Norfolk & Western Railway Company v. United States, 287 U. 8.134, 141, the court said: * * * Whether the Commission should make special classifications 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. * * * The presence of an item in investment account 100.4, *‘ Telephone plant acquisition adjustment’’, does not cause the accounts to misrepresent appel- -lants’ investment in property. Creation of said account 100.4 is in no way unfair or misleading, nor does it present a false picture. The absence of a separate balance sheet account in which to include these important items of . would necessitate the continuance of the’ present undesirable practice of including such items in telephone plant account 278, ‘‘Undistributed cost of property’’ (R. 404), which account does not appear in the ‘balance sheet. The balance in ac- count 278 is combined with the balances in all other telephone plant accounts under the present system, *” pheatar pigitea ste 21 the total of which appears in the balance sheet in one account, to wit: account 100, ‘‘Telephone plant” (R. 378). Throughout the briefs of both snoclionte and additional appellants a patent effort Has been made to stigmatize account 100.4, ‘‘Telephone plant acquisition adjustment’’, by repeated state- ments and implications that the account represents merely a deferred charge against surplus or a suspense account, while at page 17 additional ap- pellants argue that the mere title of the account casts a cloud of suspicion on the items, the costs of which are includible therein. With respect to the first contention, we submit that notwithstanding the statements of appellants, account 400.4 speaks for itself. It appears as the fourth item in the balance-sheet statement (R. 121) and is grouped with nine other accounts under the heading, ‘‘I. Investments.’’ The title of each account of the system (includ- ing account 100.4) is followed by the text of the account showing the nature of the items includible therein., In many instances the text of the ac- count is| followed by a list 01 representative items further to assist the reader. A complete system of instructions, definitions, and texts, supporting. the titles of the accounts, supplemented by illus- trative lists of items, preclude a just charge of mis- representation or deceit. 22 With respect to account 100.4, which is derived from account 276, we bring to the attention of the’ court provision (B), stated below that account (R. 123-4), viz: This account shall be subdivided accord ing to the character of the amounts con- tained therein. In addition to a copy of the journal entry recorded to open the ac- count, the company shall file with this Com- mission statements showing the basis of the computation of amounts included therein. , The detailed records supporting these state- ments shall be retained permanently by the company. The requirements of said provision (B)’ very clearly and completely contradict the contention made by the appellants that any part of the cost of acquiring property which is ineluded in account 276 (R. 157) could be concealed by segregating charges in that account into six parts and inelud- ing these separate parts in the balan¢e sheet in ac- . counts 100.1, 100.2, °100.3, 100.4 (R. 122-3) and accounts 171 and 172 (R. 140), In re invalidity of account 100.1 and account 100.4—the latter particularly—when account 276 is wholly ignored, it should be noticed that in Nor- folk and Western Railway Company v. United | States et al., 287 U.S. 134, 142-3, it was said: * * * The objection now under con- sideration asserts merely that the company is lawfully entitled to maintain a reason- pag Rt is 50 yen S Epi Peel setae ; 23 able system of accounting. But there is no right to a particular form of accounting as a" * The appellants at pages.32 and 33 of their brief and the additional appellants at pages 18 and 19 of their brief contend that there are great differ- ‘ences in principle and effect between the functions of account 100.4, ‘‘Telephone plant acquisition ad- justment’’, of this Commission’s system and ac- count 278, ‘‘Undistributed cost of property”, in the system prescribed by the Interstate Commerce Commission. A comparison of instruétion 21 of this Commis- sion’s system with instruction 21 of the present system, from which instructions accounts 100.4 and 278, respectively, are derived, clearly refutes the statements of appellants on these points. The outstanding differences between the two instructions are that under this Commission’s sys- tem the original cost of telephone plant acquired is recorded in the telephone plant accounts, whereas under the system now in effect amounts representing current value, current cost new, origi- nal cost, and residual value, ave recorded in the telephone plant accounts; and that under this Com- mission’s system, the difference between (a) the cost to the accounting company and (b) the net of the amounts recorded in the telephone plant ac- counts, 100.2, ‘‘Telephone plant under construc- tion’’, 100.3, ‘Property held for future telephone oe te tes 24 use’’, and the depreciation and amortization re- serve accounts, is separately shown in the balance sheet in investment account 100.4, ‘‘ Telephone plant acquisition adjustment’’ (FR. 123), whereas the residual element, under the system now in effect, is included in telephone plant account 278, ‘“‘Undistributed cost of property’? (R. 404), and j buried in the balance sheet in the total of account . 100, ‘‘ Telephone plant’”’ (R. 378). On this subject, Mr. W. J. Norfleet said (R. 473) : In my opinion Account 278, ‘*‘ Undistrib-: uted cost of property’’, is improperly classi- fied in the present system of accounts as a telephone plant account. It is more appro- priately includfble as a separate balance sheet account. In many ways it performs. the same function as: Account 100.4, ‘*Tele- phone plant acquisition adjustment’’, pre- scribed in this Commission’s system. The similarity between accounts 100.4 and 278 was recognized by the lower court in its opinion. See quotation on page 51 of this brief and for the same matter see R. 568, last paragraph. — The Uniform System of Accounts under consid- eration is clearly distinguishable from the system of accounts prescribed by the Public Service Com- mission in the State of New York, which was held Anvalid in New York Edison Company, et al. v. Maltbie, et al., 244 A. D. (N. Y.) 685, affixmed 271 N. Y. 103. | The difference between (a) the cost to the ac- counting company of plant acquired.from another a aw ae 25 public utility and (b) its original cost at time of © first dedication to public service (less depreciation applicable at date of acquisition) is, under this - Commission’s system of accounts, included in in- vestment account 100.4, ‘‘Telephone plant acqui- sition adjustment’’ (R. 123), whereas the system held invalid in the New York Edison case required that this residual element be included in a deferred devit account styled ‘£142. Suspense to be amor- tized.”’ See New York Edison Company v. Malt- bie, et al., 244 A. D. (N. Y.) 685. Under this Commission’s system the residual ele- ment included in account 100.4 shall, in accord- ance with provision (C) under that account, be “disposed of, written off, or provision shall be made for the amortization thereof in such manner as this Commission may direct’’, depending upon the facts and circumstances surrounding the par- ticular acquisition. Under the New York Public Service Commisison’s system, this residual ele- ment ‘‘shall be written off over such period and in such manner as the Commission [N. Y.] may by order prescribe.”’ These distinguishing features were clearly rec-_ ognized by the trial court in its opinion, quoted at p. 51 of this brief; and for the same matter see R. 568, last paragraph, where the court said: * * * This flexibility distinguishes the _system at bar from that held invalid in New York Edison Co. v. Maltbie (244 A. D. (N. Y.) — - * * | . ’ . a fu 26 See testimony of affiants (1) William J. Nor- fleet (R. 470-475, figures 1-20, R. 479-480, figures 34, 35, and R. 483, figures 1, 2); (2) Robert S. Rains (R. 486-488, figures 1-8, and R. 491, 492, figure.24); (3) John H. Bickley (R. 504-508, R. 510, letter ec, R. 514-516, figures 1-5, R. 517, 518, figures 7 and 8, and R. 519-520, figures 11-15); (4) Asel R. Colbert (R. 525-527); (5) Malcolm F. Orton (R. 534-535, letters A-C, R. 540-542, and R. 543-544) ; and (6) Charles W. Smith (R. 547- 548, letters A-B). aly PP PARR em eck oye: erry) (b) THE ORIGINAL COST PROVISIONS DO NOT PREVENT THE ‘APPELLANTS FROM CHARGING ANY DEPRECIATION EX- PENSE ON A PART OF THEIR ACTUAL INVESTMENT IN DEPRECIABLE PROPERTY This subject is related to our proposition II, and is hereinafter discussed thereunder. See p. 42, post. (27) Po ee " = oe a | SMe es adttacde etic - ea . {c) THE ORIGINAL: COST PROVISIONS DO NOT. REQUIRE, IN EFFECT, A RETROACTIVE CHANGE IN THE ACCOUNTS “OF TRANSACTIONS ENTERED INTO BY APPELLANTS; WHETHER WITH OR WITHOUT GOVERNMENTAL APPROVAL The system of accounts under attack was pro- mulgated June 19, 1935, to become ‘effective on January 1, 1936. It does not, as claimed by appel- lants, prescribe retroactive changes in the accounts. This is apparent from a reading of par agraph ) of instruction 2 (R. 97-9) as follows: | As of the effective date of this system of accounts, the several accounts prescribed herein shall be opened by transferring thereto the balances carried in the accounts previously maintained by the company. Copies of the journal entries recorded to ef- fect these transfers shall be filed with this Commission. The company is authorized to make such subdivisions, reclassifications, or consolidations of such balances. as are neces- sary to meet the requirements of this system of accounts. This provision was carried over from the ‘First Revised Issue’? promulgated by the Interstate Commerce Commission in 1933, except that the : second sentence therein was added by this Commis- ot sion. This provision does not appear to have been . protested by any of the carriers when adopted by the Interstate Commerce Commission. It will be (28) . 29 remembered that it promulgated a system of ac- counts in 1913, which was revised in 1933: The _ original system, as well as the revised system, sup- - planted those which -preceded, and were often changed. The court will find by comparison of the form * of balance sheet. prescribed by the system under stay (R. 121) with that prescribed by the system now in effect under the stay (R. 376), that invest- ment account 100, ‘‘ Telephone plant’’, of the pres- ent system (R. 378) is abolished, and that four new investment accounts are prescribed, viz: 100.1 Telephone plant in service. 100.2 Telephone plant under construction. 100.3 Property held for future telephone use. 100.4 Telephone plant aequisition adjustment. This means that the total amount in account 100 of the present system (R. 378), as of the effective date of the new system of accounts, shall be ana- _ lyzed and then reclassified in the four new invest- ment accounts as above numbered and named (R. 122-3). | It is evident from the above-mentioned provi- gions that the Uniform System of Accounts under consideration does not eliminate anything from the carrier’s previous records. The new system merely requires, for prospective application and use, classifications different in some respects from classifications in the previous system. Such re- quirement is authorized under Section 220 (a) of * 103991—36——3 ei *- tte es hee» i aia on i te ie Btls ht th eh, 30 the Communications Act, and is valid. See Inter- state Commerce Commission v. Goodrich Transit * Company, 224 U.S. 194, and Kansas City Southern Ry. Co. v. United States, 231 U.S. 423. The Interstate Commerce Commission and the State Commissions have, from the inception of accounting systems regulated by law, required cer- tain classifications of accounts, and classification of items is the fundamental characteristic of the classification of accounts. | See testimony of affiants (1) William J. Nor- fleet (R. 479, figures 32 and 33); (2) Robert S. Rains (R. 490, figure 16); and (3) Malcolm F. Orton (R. 537, letter H). Q (d) THE ORIGINAL COST PROVISIONS ARE NOT UNREASON- ABRLY BURDENSOME AND EXPENSIVE, AND THEY SERVE A USEFUL PURPOSE IN ADDITION TO THE RECORDING OF INFORMATION WHICH COULD BE MADE AVAILABLE IN SUPPLEMENTARY STATEMENTS PURSUANT TO SECTION 213 (c) OF THE COMMUNICATIONS ACT OF 1934 . sc Burdensomeness and expensiveness of per- formarce under the provisions of the Uniform System of Accounts for Telephone Companies, pre- scribed hy the Federal Communications Commis- sion, are not proper subjects for the consideration of the court. Such questions are within the juris- diction of the Commission alone. The Commission, however, has not acted arbitrarily, nor unreason- ably, in the premises. On this point, see affidavit of Mr. W. &. Norfleet (R. 484). . In United States, et al., v. Missouri Pac. R. R. Co., 278 U. 8. 269, 277-8, the ccurt said: * * * Inconvenience or hardships, if any, that result from following the statute as written must be relieved by legisla- tion. * * * [Italics supplied.] gq In the court below, the plaintiffs contested the requirement for keeping a duplicate set of ac- counts, to some extent, during the first year of the application of the system. The contest on that point, we understand, has been abandoned; and there is here less expensiveness to discuss. . (31) 32 The telephone business has, in some quarters, been estimated to have assets exceeding five billion dollars—an amount said to he about one-fourth the value of all the railroads in the country. It is to be assumed that if there is to be effective regu- lation of the telephone carriers there necessarily ‘must be reasonable experise therewith associated. The reason underlying the original cost provi- sions of the Uniform System of Accounts under stay and the purposes served thereby were clearly and concisely stated by Mr. W. J. Norfleet in his affidavit, as follows (R. 470): | * * * The reason for this reqtiire- ment is the need for continuity and uni- formity in accounting for the original cost regardless of the changes in ownership of the property or the incident of ownership at a given time, and to bring about uni- {formity in the statement’ of plant accounts of public utilities. Such continuity and uniformity. are essential from the stand- point of charges to operating ‘expenses for depreciation, from the standpoint of pass- ing upon security issues, from the stand- point of considering the reasonableness of the purchase price of property to be ac-, quired, and from the standpoint of valua- . tion for rate-making purposes. On this subject, Mr. Norfleet further testified as follows (R. 471-2): ’ With respect to a minor part of telephone ‘plant now in existence which was acquired d ; 33 by the telephone company from other pub- lic utilities, the telephone companies have indulged in optional accounting with the result that certain property so, acquired has _ been included in the plant accounts at *‘ac- tual cost te the company”’, other property ’ being recorded by a *‘merger of the book - accounts’’, other property being recorded *? at the ‘‘current cost new’’, and still other property at ‘‘structural value.” * * * >. / Although the plant accounts are now stated, as/heretofore described, depreciation charges are computed on *‘book cost’’, and retirements are made on *‘average cost”’ or ‘foriginal cost.’ The Commission’s system ‘of accounts corrects these inconsistencies in addition to providing information for the other purposes hereinbefore mentioned, in that it requires all items of telephone piant account to he stated on basis of “‘origjnal cost’’ and that depreciation and retirements be computed on the same basis. The appellants denounce the application of See- tion 220 (a) of the Communications Act of 1934 in such way as to require the inclusion in account 100.1 of the item of original cost as defined in the Uniform System of Accounts, because, as they say, a statement of such original egst may be had under Seetion 213.(c) of the Act; but, as the trial court said | (R. 566): * * *® The powers conferred by See- tion 213 (c) are not restrictive of Section 34 | 220 (a) nor does the latter section restrict the former. The two sections are capable of complementary treatment. Section 213 (¢) provides in part: The Commission may at any time require any such carrier to file with the Commission a statement showing the original cost at the _ time of dedication to the public use of all or of any part of the — owned or used by said carrier. * * The gist of the foregoing is that the Federal Com- munications Commission may at any time call for the statement showing the original cost therein mentioned. : | The mere possibility of performance under pro- visions above quoted from Section 213 (ce) which the Commission may but is not obligated to apply, cannot be invoked by the carriers to defeat per- formance which the Commission may and does re-. quire under Section 220 (a); furthermore, Section - 213 (ec) assumes—at least contemplates—the possi- bility of an established system of accounts to which recourse may be had to obtain the statement which may be separately required under the aforesaid Section 213 (¢), as it continues as follows: * * * For the showing of such origi- nal cost said property shall be classified, and the original cost shall be defined, in such . manner as the Commission may prescribe; and if any part of such cost cannot be de- termined from accounting. or other records, 35 the portion of the property for whieh such | cost cannot be determined shall be reported | to the Commission; and, if the Commission. .2 shall so direct, the original cost thereof — shall be estimated in such manner as the ' Commission may prescribe. * * * As further indication that Congress did not intend that Section 220 (a) should be ‘subserv- ient to or superseded by Section 213 (2), we notice the following language of the latter section: * * * Tf the carrier owning the prop- erty at the time such original cost is re- ported shall have paid more or less than the original cost to acquire the same, the amount of such cost of acquisition, and-any facts which the Commission may require in con- ' nection therewith, shall be reported with such original cost. * * “* , The said Section 213 (c) further provides: * * * The report made by a carrier - under this paragraph shall show the source or sources from which the original cost -re- ported was obtained,.and such other infor- mation as to the manner in which the report was ° prepared, as the Commission shall require. f - By reference to the Communications Act of 1934, it will be seen that Section 213 falls under the subtitle ‘Valuation of Carrier Property”, and no doubt every subdivision of said section from (a) to (h), inclusive, has some proper function to per- form ; and, with respect to the application of Sec-: 36 tion 220 (a), at the same time we notice Kansas City Southern Railway Company v. United States, et al., 231 U. S. 423, 443; as follows: * * * Andsinee, * * *, uniform- ity in accounting is dependent: upon the adoption and enforcement of precise clas- sification, the authority to define the terms of the classification necessarily follows. H amounts, after all, to no more than laying down rules of action under which the Com- mission shall proceed, and leaving it to the Commission to apply those rules to particu- lar situations and circumstances by the establishment and enforcement of adminis- trative regulations. Section 213 of the Communications Act is prac- tically identical with Section 19 (a) of the Inter- stafe Commerce Act as amended by the Emergency Railway Transportation Act of 1933. Section 220 of the Communications Act is de- rived from Section 20 (5) to (8) of the Interstate Commerce Act. In Norfolk d& Western Railway Co. v. United States, et. al., 287 u. &. 134, 140-1, the court .eon- sidered Sections 15 (a), 19 (a), and 20 of the Interstate Commerce Act, and allowed each Section full foree and effect. In United States v. Atlanta B. & C. Ry. Co., 282 U. 8.7522, 529, the court considered Section. 20 (1) to (5) and Section 1 (20) of the Interstate Commerce Act, and allowed full force and effect to each: | 37 In each of the cases cited, the Supreme Court. sustained the accounting provisions of the law be- cause such provisions appeared to be necessary in the administration of other provisions of the Act. In the aforesaid Norfolk & Western case, particu- larly, the court sustained an accounting order upon the requirement in the valuation section of the Interstate Commerce Act. ; Section 220 (a) and (b), should be allowed to operate in aid of each other—in the light of each ‘other, and in conjunction with Section 219 (a) and (b); and Section 220 (a) to (h) should be allowed to operate in the aid of Section 213 (a) to (h); and in connection therewith it should be noticed ‘that the Federal Communications Com- mission has duties under Section 204 of the Act, and under Section 205 of the Act, which deal with hearingsand orders in rate matters. For the aid of Sections 204 and 205, and to enable the Com- mission to proceed advisedly thereunder, many other sections should have full and es application and enfor cement. : In United States v. Atlanta B. &C. R. Company, supra, at p. 527, the court, discussing proceedings before the Interstate Commerce Commission, said: * * * Its functions are manifold in character. In some matters its duty is merely to investigate and to report facts. See United States v. Los Angeles & Salt Lake R. Co., 273 U. S. 299, 310. In others, to make determinations. See Great North- 38 ern Ry. Co. v. United States, 277 U. S. 172. In some, it acts in an advisory capac- ity. Compare Minneapolis & St. Louis R. Co. v. Peoria & Pekin Union Ry. Co., 270 U. S. 580, 584-5. In others in a super- visory. * * * It is beyond question that the original cost pro- ‘visions ef the Uniform System of Accounts, pre- scribed under Section 220 (a) of the Conmunica- tions Act, serve useful purposes additional to that of any statement that might be required under Section 213 (c) of the Act. | _ The attention of the court is respectfully called to Tri-State Telephone d Telegraph Company Proposed Control, 180 I. C. C. 229, and to Tri- State Telephone & Telegraph Company Control, 193 I. C. C. 383. The said cases comprised a matter where one of the Bell companies sought to acquire a telephone company at a price far in excess of its true value. The application was denied in-the first instance, _ and, thereafter, the company made a proposal to make the purchase for a much smaller amount. The latter application was approved. The. Com- mission stated, 193 1..C. C. 383, 384-5, that: This application * * * was denied on the sole ground that the price proposed to be paid was greatly in excess of the equity in the properties represented by the stock and was therefore not in the public inter- om Ss RK iad ‘6 : . 2 ; ibe en See REN = cine Arey hs ‘ ee) ee PU 39 The appellants have complained of the difficulty of showing original cost, but eminent authorities are in disagreement with appellants. See ‘‘Rail- road Finance and Organization”’, by William Z. Ripley, at pages 347-8: ‘*Book' value”’ or cost of property, as we have already seen, seldom represents any- thing even approximating to the facts. The meagreness of corporate records, either be- cause of carelessness or bad faith, is indeed a severely practical objection; and 1 yet ex- perience has already shown that original cost can be unearthed. The most substan- tial attempt along this line is the inventory made by the Washington Railroad Commis- sion in 1905. The actual investment was found to be obtainable for practically all of the property..* * * [Italics supplied. ] We see no reason why practical and satisfactory results cannot be obtained by an examination of the historical records of properties acquired by pur- chase, and by engineering and other studies. Diffi- culties encountered in determining such an impor- tant fact as original cost of. property in public use do not justify continuation of an improper ac- counting procedure such as that now in effect: Cf. Sharfman, The Interstate Commerce Commission, Vol. III-A (1935), pp. 143, ét seq. The recording of items in the accounts, and par- ticularly telephone plant accounts, on basis of esti- mates, is not an innovation in public utility ac- ew ige 40 counting, or in any accounting procedure for that matter. For example, the accounting regulations heretofore and now in effect governing the record- ing of telephone plant purchased (instruction 21), and which appellants have elected to use in many instances, provide that (R. 365-6) : When property in use in telephone serv- ice is purchased, * * * there shall be charged as of the date of purchase: (1) To account 211, ‘‘Land’’, the estimated current value of the land; (2) to the depreciable plant accounts, the current cost new (estimated if not known), of the property classable, therein; (3) to account 202, ‘‘Franchises’’, the original cost of all gov- ernmental franchises and similar rights ac- quired; and (4) to accounts 232, ‘Station installations’, and 233, ‘‘Drop and block wires’’, such proportion of the estimated current cost new, efc. [Italics supplied.] Incidentally, the accounting now performed by appellants for depreciation and for employees’ pensions is almost exclusively based on estimates : involving highly complicated actuarial computa- tions. . : The testimony of the Chief Accountant of the Federal Communications Commission, and of other accountants of experience and repute, shows that the order under attack in this case, and the accounts and instructions covered thereby, can be competently and fairly applied by the appellants, whether as classes or as individuals. PRN A RESTS — © ~~, 41 See testimony of affiants, (1) William J. Nor- fleet (R. 477-479, figures 26-31, and R. 484, figure 1); (2) Robert S. Rains (R. 489-490, figures 12- 15); (3) John H. Bickley (R. 510, letter d); (4) Asel R. Colbert (R. 530); and (5) Maleolm F. Orton (R. 535, letter D; and R. 538, letter B.) wih ite Coa wy 4 ! oon! pay Ene ‘ pL eet A A hb te mt TZ THE PROVISIONS OF TELEPHONE DivistION ORDER No. 7-C (ParacrapH (C) or THE TEXT OF ACCOUNT 100.4, ‘‘ TELEPHONE PLan® ACQUISITION ADJUST- MENT’) THat (R. 124): “THE Amounts REcoRDED IN THis AccouNT WITH REsPEcT TO EacH PRopERTY ACQUISITION SHALL BE DisPogED OF, WRITTEN OFF, OR PROVISION SHALL BE MADE FOR THE AMORTIZATION THEREOF IN SUCH MAN- . NER AS THIs Comission May Direct” Are Not Voip The phrase ‘‘disposed of’ is primarily defined | by recognized lexicographers as meaning “‘ar- ranged or set in order”, and not as meaning ‘‘extinguished or annihilated’’ as intimated by ap- pellants. An item in this account may be disposed of by allowing it to rest in the account until the property to which it is related is retired from service. _ The points numbered I-b and II in the State- mer’ of Points, upon which appellants rely in their appeal in this case, are so closely related (see p. 27, ante) that we have until now postponed discussion of proposition I-b to avoid repetition (notice, too, discussion of the New York Edison case, appearing in this brief, ante p. 24, et seq.). (42) , 43 The provisions of this Commission’s system of accounts, now under attack, which would govern appellants’ accounting for depreciation, are sep- arate.and distinct from the provisions governing the accounting for recording their investment in | plant. It is, therefore, apparent that the original cost provisions neither prevent nor require the accounting for depreciation expense by the ' appellants. The point which appellants apparently weuld make by their. statement (I-b), is that aecount 100.4, “‘Telephone plant acquisition adjustment’’, in which is included a part of their investment; is not designated a depreciable account as such in this Commission’s system. This is not new in accounting, nor unique in the system under attack. There are other means of accounting for loss in service value of property than by charges to operating expenses for deprecia- tion. Appellants are not now permitted, nor have they since 1913 been permitted to include in operat- ing expenses, through charges for depreciation, the full purchase price of property. - Under the present system a part of appellants’ investment in plant is now recorded in account 278, ‘‘Undistributed cost of property”? (R. 404). De- preciation accounting is not permitted for prop- erty represented by amounts in this account, and ‘ the amounts vecorded therein can’be (and properly should be) extiziguished only through surplus. Stet attach ita POOR SEAN itil mi EROS cP Oy LT OD INCE Te Oe wer. 44 A part of appellants’ investment is now recorded | in accounts 202, ‘‘Franchises’’, and 203, ‘‘ Patent rights”? (R. 394). These investments are not now designated as depreciable, but provision is made for the amortization thereof in such manner as to produce the same result as weuld obtain under depreciation accounting. | A part of appellants’ investment in plantis now recorded in accounts 232, ‘‘Station installations’’, and 233, ‘‘Drop and block wires’* (R. 399). These properties depreciate just as any other de- preciable property, but the accounts in which in- vestment in such property is recorded are not designated as accounts covering classes of depreci- able telephone plant (instruction 82, R. 376). Because of circumstances peculiar to such prop- erty, the full service loss is charged to operating expenses at time of retirement. There were sound reasons for the Interstate Commerce Commission’s accounting treatment of the forégoing properties, to wit: ‘‘Undistributed cost of property’’, ‘‘Franchises’’, ‘‘ Patent rights’’, ‘‘Station installations’, and ‘‘Drop and_ block wires’’, and for omitting such properties frem the classes of depreciable telephone plant. The Federal Communications Commission is authorized by Section 220 (4 of the Communica- tions Act of 1934 to: * * * prescribe * * * the classes of property for which depreciation charges may be properly included under operating ? 45 expenses,and' * * * when it deems nec- essary, modify the classes * * * so prescribed. * * * In exercising its authority in this respect, this Commission has prescribed certain classes of tele- phone plant named in instruction 82 (R. 120). There are sound reasons underlying the omission by this Commission of property represented by account 100.4, ‘‘Telephone plant acquisition ad- justment’’ (R. 123), from the classes of en property. There are also sound reasons underlying pro- vision (C) of the text of account 100.4, ‘‘Telephone plant acquisition adjustment’’, that (R. 124): The amounts recorded in this account with respect to each property acquisition shall be disposed of, written off, or pro- vision shall be made for the amortization thereof in such manner as this Commission may direct. The Commission might have followed the pres- ent system, by providing that the amounts recorded in account 100.4 should be extinguished only through surplus, or in the same manner as that part of appellants’ investment now recorded in account 278, ‘‘Undistributed cost of property”’ (R. 404), can be disposed of. Such a provision would, in some instances, be unfair to appellants. Provisions might also have been made that all amounts recorded in account 100.4 should be ex- tinguished only through charges to operating ex- 103991—36——_-4 46 penses for depreciation thereof. Such a provision would be unfair to the subscribers in those in- stances involving capitalization of earning power, cost of elimination of competition, excessive pay- ments to affiliates, and other costs not in the public interest. Provision might also have been made for distribution of the amounts recorded in account . 100.4 equally between operating expenses and sur- plus, but this provision, or any other such pro-- vision, would, under some circumstances, be arbi- trary and unreasonable. In view of the foregoing, the Commission has recognized the necessity of ascertaining facts in each individual case before prescribing the final accounting to be performed in that case. It should be apparent that such provision is imperative in the interest of fairness to all parties and for pur- poses of maintaining uniformity in accounting procedure. Furthermore, where the accounts of utilities of different sizes and different business practices and policies are to reflect the purchase of property from predecessor companies, and from affiliated - companies, and such acquisitions are frequently made through the purchase or exchange of securi- . ties or properties, the issuance of individual orders requiring a particular carrier to make specific en-— | tries with respect to transactions as to which no * inflexible specific accounting rules, regulations, or classifications can be nicely or precisely made un- - 47 til the facts are known, is proper, grderly, and valid; and it is necessary, if the public regulation ‘of public utilities is to be useful and successful. (See instruction 21 (C) (R. 109).) As we have previously stated, amounts included _in account 100.4, “*Telephone plant acquisition ad- "justment”, (R. 123) may represent, under differ- ing circumstances, a portion of the amounts paid for various and sundry tangible and intangible items. The Uniform System of Accounts contains gen- eral fules for the distribution of expenditures, ac- cording to their character, to investments, operat- ing expenses, income, -surplus, and other accounts. (See instruction 10, ‘Purpose of balance-sheet ac- eounts’’ (R. 104) ; instruction 20, ‘Purpose of tele- phone plant accounts’’ (R. 107); instruction 30, ‘*Purpose of income accounts”’ (R. 115) ; instruec- tion 40, ‘‘Purpose of surplus accounts’’ (R. 116) ; - instruction 50, ‘‘Purpose of operating revenue accounts’? (R. 116) ; instruction. 60, ‘‘Purpose of operating expense accounts’’ (R. 117); and in- struction 70, ‘‘Purpose of clearing accounts’”’ (R. 118).) As stated by Mr. W. #. Norfleet in his affidavit (R. 476) :. | Affiants for plaintiffs say that the amounts to_be recorded in Account 100.4 must be extinguished either immediately or later at the pleasure of the Commission, and ick Bache ae Re ee tar eee Wes Ade Cab arene Leng a eT ae: ne ee ee eT ee ‘dele deeitat — : 48 .that such amounts are a deferred charge _ against surplus, since the Commission can : make it such a charge at any time. This is purely speculative and unsupported by the system of accounts, the general rules of which govern the disposition of items not specifically provided for. The affiants may just as well have made the proper assum p- tion, namely, that the disposition of the amounts: to be recorded in Account 100.4, “Telephone plant acquisition adjustment” =? would be disposed of, after the character of : the item had been determined, in a manner consistent with the general rules underlying = the uniform system of accounts for the dis- : tribution. ef expenditures, according to their | character, to operating expenses, income, ~— surplus, or remain an investment. [Italics : supplied. ] The court below likened amortization to depre- — ciation (R. 569). There is support for such posi- tion. See Whitten on ‘‘ Valuation of Public Serv- ice Corporations”, 2d ed., section 853, wherein ref- erence is made to the American Telephone and Telegraph Company as recommending the straight line method of depreciation. We quote the fol- lowing (p. 1830): © | | The function of depreciation reserve is to amortize the: portion of the expense of conducting the business caused by using up this depreciable property. 49 The following statements authorized by the Ex- ecutive Committee of the American Accounting Association appear in an article in the J une 1936 issue of ‘The Accounting Review”’ (p. 188) : 5. The application of these principles should be broad enough to cover amortiza- tion of fixed assets through allowances for depreciation, depletion, and obsolescence, and reductions of inventory and investment costs to amounts allocable to succeeding periods, : * * * * te 10. The operations section of the income statement should disclose the gross revenues from sales made and services rendered; the elements of operating cost and expense in- curred, including the amount of deprecia- tion and other amortization of assets appli- cable; * * *, [Italics supplied.] It is apparent from the foregoing that there is abundant authoritative support for treating depre- ciation as a class or type of amortization. All consumption, in operation, of costs incurred in the acquisition of property in use in telephone service is not jE a oneew through ‘‘depreciation charges.’”” The Commission may rightfully ex-. clude from ‘“‘depreciation expenses.’ and style as “amortization expenses’, or by any other term found appropriate in the. circumstances, amounts appearing in account 100.4 which it finds appel- lants entitled to recover as operating expenses. LS 9 5 % . : ¢ § . & re ey, LIDIA URED Ley Cae RELEASE EE $e epee Seige oe a gen SARS RRR LO NME To aA i 4 or ‘ EIN aabinsaete iti Ni tank PAPA cab cee Ai ile ka Av a Sots 0s ent ied oA = + ss ow h : ” . “ ae 00 For such recovery the Commission has made among other pertinent provisions the following: (1) In provision (B), under account 100.4, the rule that ‘‘this account shall be subdivided according to the character of the amounts contained therein’? (R. 123) ; (2) The statement in instruction 60, that ‘the operating expense accounts are de- signed to show the expenses of furnishing telephone service’’ (R. 117); and (3) In provision (B), under account 172, ‘‘Amortization reserve’’, the provision that “it shall also be credited with any amounts which this Commission may authorize un- der a plan to-amortize the balance in, ae- count 100.4, ‘Telephone plant acquisition adjustment’ ’’ (R. 140). Upon comparing the system of accounts under stay during the pendency of this appeal with the system of accounts heretofore and now in effect under the stay, the trial court, upon consideration of the original cost provisions of the. new system, entered into a discussion of the objection of appel- lants that no depréciation is allowed on amounts charged to the ‘‘Telephone plant acquisition ad- justment’’ account. Such discussion carries its own argument with it. The court said (R. 568-9) : On a comparison of the two systems, that of this Commission seems to more accur- ately reflect the condition and record the history of the plant. Account 100.4 is listed among investments. It can be subdivided o1 so that there can be segregated any. amount : therein not representing (1) the cost of | elimination of competition ; (2) payment to an affiliate at a price in excess of cost to it with a profit returnable to the purchasing company in the form of dividends or other- wise; and (3) any other.element not ex- pended in public interest. This segregated amount would receive the | same treatment substantially in the rate and depreciation basis as would amounts ap- pearing in 100.1, ‘‘ Telephone piant in serv- jee.’ In this ight, it appears that the pro- posed system merely provides segregation, and that the addition of the amounts in these investment accounts 100.1 through 100.4 would accurately picture the legiti- mate investments of the purchasing com- pany.. : To follow the plaintiffs in their argument that a reserve of surplus must be maintained against 100.4 and that this is fundamentally wrong, would be to ignore the similarity be- tween 278 of the present system and 100.4 of the proposed system, and further it re- quires the assumption that the Commission will act improperly in the future under 100.4 (ce). This cannot be presumed. The order provides for alternatives adaptable to the facts of individual cases. This flexi- ; bility distinguishes the system at bar from that held invalid in New York Edison Co. v. Maltbie (244 A. D. (N. Y.) 685). This. cannot be held, before any order under 100.4 aq e & a te i- € oe - e ¥ a x * a in 3% ‘ ie sega” I A I LUE IN NED MS Sah wd ARM APL DEE IIS TA (c) has been made by the Commission, to be such an arbitrary method of accounting that the order imposing it is void. The same argument applies to the hises: tion that no depreciation is allowed ag..inst item 100.4 ‘‘acquisition adjustments.’’ This complaint anticipates arbitrary action by the Commission, under 100.4 (¢), 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 unrea- sonable, the Commission is within its powers. The court need not agree the accounting pro- posed is the best method, but at this stage it cannot be said the provision is arbitrary. The objection is made that the Commission’s refusal to act properly within 100.4 (c) would constitute-a negative order, nonre- viewable within the doctrine of Procter & Gamble v. United States, 225 U. S. 282. This would not cut off the plaintiff’s right of attacking the system as it would apply to them affer such a refusal. The appeal need not be on the order denying relief but can be against the system as its oper aaa is affected by such denial. , There is no deprivation of property in- volved here. The Supreme Court has noted — that the question merely concerned account- ing and that there was no occasion to hold ee te oe Ol Ee ae BS a ———— med naa hase Sk Ly . 53 the order invalid as a deprivation of prop- erty until actual damage was threatened by it as in the use of an improper rate base in setting rates. N orfolk & Western Ry. Co. v. United States, 287 U. 8. 134; United it would be fitting and proper that such portion of « States v. Los Angeles & Salt Lake R. R. Co., F 273 U.S. 299. ; In the last paragraph on page 15 of their brief f additional appellants state: ; We are discussing the right of. the Com- 3 mission under the guise of prescribing ‘ ‘‘forms of account’? to require these com- 4 panies to write off from their books a loss 3 which they have in fact not suffered. : This Commission has assumed no such ri ght in the system of accounts under attack in this suit. The ; Commission has, and we believe rightfully so, re- e served the right to require a company to write off 4 from its books a loss which they have in fact suf- fered. ‘This, we believe, is in the public interest in i order that the reader of the balance sheet may be : correct in assuming that amounts paid for prop- 3 erty which is no longer in existence are not . included in the balance shect as investment in tele- : phone plant. This cannot be correctly assumed 4 under the system heretofore and now in effect. ° There may be instances where the purchase price ; of property is represented by exorbitant amounts ; paid for the capital steck of the company whose [ property is acquired. Under such circumstances : LD ARM ee ab ems we a 54 ‘ . that*cost as does not represent value received should be written off to surplus. Furthermore, se- curities of the acquiring company are often exchanged for property, and valuations placed on such securities by the acquiring company may be excessive. Surely such excessive valuations should not be included in depreciable telephone plant ac- counts or otherwise shown in the balance-sheet statement as legitimate investments. Under provision (C) stated below account 100.4, “Telephone plant acquisition adjustment” (R. 124), carriers are not compelled—in the light of the alternatives provided therein—to write off any amount in said account. Provision (C) stated below account 100.4 is a : statement directory in character setting forth means further to account for items included in said account and merely provides for alternate actions that may be found appropriate by the Commission in cases arising in the future. Without such future action, there will be no case or controversy subject to judicial review. Until then, said provision (C) will remain purely direc- Story or advisory. Contrast United States v Atlanta B. & C. Ry. Co. (1931), supra, with Atlanta B. & C. Ry. Co. v. United States (1935), 296 U. S. 33, wherein the Supreme Court dis- tinguished between an accounting order which is subject to judicial review and an order, merely. declaratory of rules, not subject to review. SE ae opie 2 i ta 59 All contention respecting the propriety of in- structions, as distinguished from the validity of accounts, is therefore prematurely precipitated. The attempt to invalidate instructions or provi- sions in the nature of directions or instructions in the Uniform System of Accounts, at this time, is based upon no consummate right. It is with- out present foundation either in fact or law. As the trial court said, the appellants have been done no actionable wrong until the Federal Com- munications Commission shall have made some arbitrary and unréasonable requirement with re- spect to disposition of amounts in investment ac- count 100.4. See testimony of affiants (1) William J. Nor- ‘ fleet (R. 476-477, figures 21-25, and R. 481-482, figures 1-4) ; (2) Robert S. Rains (R. 488-489, fig- ures 9-10, and R. 490, figure 17); (3) John H. Bickley (R. 511-512, 516, figure 6, R. 518-519, figures 9-10, and R. 520-521, figures 16-17); (4) Asel R. Colbert (R. 527-528); (5) Maleelm F. Orton (R. 535-537, letters E-G) ; and (6) Charles W. Smith (R. 548-549, letters C-D, and R. 550). The District Court did not err in holding said provisions valid. a isi ha ch Doe A toells,\: mn aa » 2 See ohat <2 Galt Le eee Eat en Ay «te mmm a : ‘ . sah i P ‘ a, SS : oars so betas heel ay elena oe RAP Ae YN Ades iloh bade Dees Seid a Ds menue . 59 (2) that since net operating income is one of the most vital items in the company’s statements, out- lays’ of money, being paid and non-recoverable, should enter into the computation of net operating income irrespective of whether or not they are rea- sonable or unreasonable, and (3) that, under the instruction, the accounting company acts at the peril of criminal prosecution in recording every item of outlay for property, Wages, salaries, or . other expenses. With respect to the first contention, it should be noted that under instruction 2 (A) of the Uni- form System of Accounts (R. 97), the appellants are required to keep records of sufficient particu- larity to show fully all the facts pertaining to all] entries in the aforesaid Uniform System of Ac- counts. The sources of charges to Telephone Plant, Income, Operating Revenues and Operat- ing Expenses under instruction 2 (B. 1) are found in the records to be kept under instruction 2 (A). Instruction 2 (B., 1) does not impose upon ap- pellants any incorrect or unsound method for mak- ing charges to accounts mentioned therein, nor does it postulate obedience to any indefinite or vague standard of conduct contemplated thereby. - Instruction 2(B.1 ) deals primarily with charges, ‘merely directing that they, to wit, charges, “shall be just and ‘reasonable’” and secondarily with “payments by the company in éxcess of such just and reasonable charges.’ The instruction shows no intent to determine what payments shall be 60 made. It only deals with charges after payments are made, Although it may be the duty of a bookkeeper to make entries in accordance with transactions, the officers and managers of a public utility have some responsibility to the public as well as to the com- paay, and it is their duty under the law to see that all transactions are just and reasonable, not only to the company, but to the public. ~ While there may be a presumption that all transactions entered into by and between a public utility and another are reasonable and just, and while it may be that responsible accounting officers should record transactions as they occur, in this connection it must not be overlooked that, when accounting is made and reported, the Commission has a right to reject the accouniing as made and to require something in lieu thereof. That, perhaps, is the reason why, in Section 220 (g) of the Act, reference is made to ‘‘keeping of accounts, records, and memoranda”’ prescribed, and then _ further reference is made to such accounts, rec- ords, and memoranda ‘‘as may be approved by the Commission.’’ Upon the rejection of any report covering an account which the account- ing officers considered prima facie to be just and reasonable, the Commission, under Section 220 (@) of the Act, would have a right to direct . that the excess above just and reasonable ‘charges should be charged to account 323, ‘‘ Miscellaneous ebay * % t ~~ eee eee = i a Rte Pe a ie Wheaten SA na OL AE Hse Bist ih dapat artntincth wit mBdkalesd 61 * incoffie charges”’ (R. 163) ; and it affords the Com- mission a better basis for requiring such transfer to have the specific demand in the first instance 3 that all charges be just and reasonable, : Ss In view of the foregoing, we see no merit in: the E second contention of appellants. 4 The appellants’ third contention is hereinafter | discussed at pages 63-66. » | e 103991—36——__5 . (a) THE INSTRUCTION IS NOT CONTRARY TO THE FUNDA. MENTAL PRINCIPLES OF CORRECT ACCOUNTING, AND IT WOULD NOT COMPEL A FALSIFICATION OF THE ACCOUNTS OF THE APPELLANTS This statement is fully covered in the discussion of other propositions herein argued (see pp. 56-61 ante), and in addition thereto we bring to the attention of the court the following statement of Mr. W. J. Norfleet in his affidavit (R. 484): In my opinion and for the. reasons hereto- fore mentioned, the requirements of this Commission’s system of accounts are in no way contrary to fundamental principles of - correct accounting but are, in fact, in con- formity therewith and are neither arbitrary nor unreasonable. See testimony of affiants (1) William J. Norfleet (R. 482-483, figures 1-2); (2) John H. Bickley (R. 513-514, and R. 522, figure 27); (3) Asel R. Colbert (R. 529); (4) Mateolm F. Orton (R. 539- 540); and (5) Charles W. Smith (R. 551). (62) Vek tic ae eR (b) THE INSTRUCTION DOES VOT LAY DOWN A RULE OF ACCOUNTING, TO WHICH APPELLANTS MUST CONFORM ON PAIN OF THE STATUTORY PENALTIES, SO VAGUE AND INDEFINITE AS NOT TO CONSTITUTE A LEGAL STANDARD OF CONDUCT The decisions heretofore cited and previous comment abundantly refute appellants’ contention that the aforesaid instruction lays down a rule of accounting so vague and indefinite as not to con- stitute a legal standard of conduct. In support of their third contention (ante p. 59) that, under the aforesaid instruction, the account- ing company must act at the peril of criminal] pros- ecution in recording every item of outlay, appel- lants cite the following cases: United States y. Cohen Grocery Co., 255 U.S. 81; Tedrow v. Lewis & Son Co., 255 U.S. 98 ; Small Co. y. A merican Sugar Refining Co., 267 U.S. 233 ; Connally v. General Coustruction Co., 269 U.S. 385; : Cline v. Frink Dairy Co., 274 U.S. 445, None of the foregoing cases is appheable to the suit at bar. | In. the first three eases cited, the Lever Act, Which made it an offense against the United States, punishable by fine or Imprisonment, “to make an : (63) 64 unjust or unreasonable rate or charge in handling or dealing in or with any necessaries’’, was under attack. The fourth case cited involved a state law which made it a crime to pay, ‘‘less than the current rate of per diem wages in the locality in which the- work was performed.”’ In the fifth case cited, the court examined.a state law which covered different sorts of conspiracies and combinations in restraint of trade, employing terms which the court said, ‘‘sufficiently describes for purposes of a criminal statute the acts which it intends to punish’”’ (pp. 455-6). Congress has the power to delegate to the Fed- eral Communications Commission the authority to prescribe the uniform systems of accounts and the exercise of that power is not an unlawful delega- tion of the legislative function. See Interstate Commerce Commission V. Goodrich Transit Com- pany, supra, at pp. 214-5; Kansas City So. Ry. v. United States, 231 U.S. 423, 443. The Communications Act of 1934, like the Inter- state Commerce Act, created a commission as a legislative agency authorized to determine what is reasonable or unreasonable with respect té the reg- ulation of carriers; and a carrier subject to the regulation “of the Federal Communications Com- mission may and can, in every instance, know in advance what is required in any case long before -eriminal prosecution may or can be lodged in any court. ea Section 220 (a) of the Communications Act of 1934 is derived from Section 20 (5) of the Inter- state Commerce Act and the Supreme Court, re- ferring to that section in Kansas City So. Ry. Co. v. United States, 231°U.'S. 423, 443, said: * * * it amounts after all to no more than laying down the general rules of action under which the Commission shall proceed, and leaving it to the Commission to apply those rules to particular situations and cir- cumstances by the establishment and en- forcement of administrative regulations. The proposition that instruction 2 (B. 1) is arbi-. ; trary and void under the due process clause ig untenable. That is certain which is capable of || being rendered certain. 7 Instruction 9 of the Uniform System of Accounts provides (R. 104) : | To the end that uniformity of accounting may be maintained, the company shall sub- mit all questions of doubtful interpretation . - of the prescribed accounting to this Com- mission for consideration and decision. See also Section 220 (g) of the Communications Act of 1934, under which the Commission may ap- prove accounts with the same authority as it pre- scribes them under Section 220 (a).. The trial court, discussing instruction 2 (B. 1),° in its opinion, said: The information this requirement makes available is essential to any determination NONE se cnn Ln alta te Ra hanced tn SOL Oe ee a ss ee A 66 of: reasonable rates within 201 (b) of the Act * * * (8. 570). * * * telephone companies need incur no risk since those occasional cases which may be. doubtful can be submitted for ap- proval under Sec. 220 (g) of the act and instruction 9 of the order * * * (R.571). The necessity of this order becomes ap- parent upon consideration of the interrela- tions of telephone companies. License agreements between subsidiaries can furnish examples of charges clearly not ‘‘just and reasonable.’’ Yet any exact definition would be objectionable as arbitrary (R. 571). The District Court did not err in holding said instruction valid. ern rine an IV 5 . OrpER No. 7-C or THE TELEPHONE DIVvIsIon OF THE FEDERAL COMMUNICATIONS CoMMIssIoN Dors Not, Witu Respect to INVESTMENTs IN ITEMS OF PROPERTY TO BE ENTERED RESPECTIVELY IN Accounts 100.1, 100.3, AND 103, Lay Down RULEs or ACCOUNTING So VaAquE AND INDEFINITE _AS Nor to Constiture a LEGAL STANDARD OF Conpuct UNbER APPLICABLE PROVISIONS OF Law, AND THE REFERABLE INSTRUCTIONS IN SAID ORDER Are Not Arprrrary, aND THEY Do Not Deprive THE APPELLANTS OF THEIR RIGHTS UNDER THE Dur Process CLAUSE OF THE Firru AMENDMENT TO THE CONSTITUTION OF THE UNITED STATES The provisions of the system of accounts com- plained of by the appellants, whether directly or indirectly, are as follows: 100.1. Telephone plant in service.—This account shall include the original cost (note. instruction 3-S.1) of the company’s prop- erty used in telephone service at the date of the balance-sheet as classified under ac- . counts 201 to 277, inclusive. (Note also in- structions 3-AA, 20, and 21.) (R. 1223.) 100.3. Property held for future telephone use.—(A) This account shal] include the original cost (note instruction 38.1) of (67) 68 “property owned and held for imminent use in telephone service under a definite plan for such use. (B) The property ‘inchudea in this ac- account shall be classified “according to the primary accounts for telephone plant in service. Separate subaccounts shall be pro- vided for this purpose which accounts shall carry the same numbers as the plant ac- counts except that each account shall be prefixed by (1). (Note-also instructions 20 and 21.) (R. 123.) 103. Miscellaneous physical property.— This account shall include the company’s in- vestment in physical property other than property the investment in which is inelud- ‘ible in accounts 100.1, ‘‘Telephone plant in — service’’, 100.2, ‘‘Telephone plant under con- struction’’, and 100.3, ‘‘Property held for future telephone use.’’ It shal Include the company’s investment in telephone property retired (note instruction 3-T) and held for ‘sale; also property such as lighting, water, power, and manufacturing plants, not held incident to the company’s telephone opera- tions, and assessments against miscellaneous physical property for the construction of public improvements (R. 125). 3. Definitions—When used in this system of accounts: * * * * * (O) ‘‘Miscellaneous physical property” - means all ‘physical property owned by the company, other than telephone property the 69 investment in which is ineludible in accounts 100.1, ‘‘Telephone plant in service’’, 100.2, Tephone plant under construction’’, and 100. . ‘‘Property held for future telephone use.’ * a * * * * (BB) “Telephone plant’’ means physical property used in telephone service (R. 99-102). Argument of appellants and acditional appel- lants, under this point upon which they rely, ro primarily to the use of the word ‘‘imminent”’ i the text of account 100.3 (quoted above) and to the classification of ‘‘spare plant.”’ Unless the use of property in telephone service is ‘‘imminent’’, as that word is used and under- stood by publie utility accountants and regulatory authorities, charges for depreciation, taxes, and | ‘Maintenance applicable to such property should not be included in net operating income nor should the original cost of the property be included in account 100.3. The word “‘imminent” and the term “‘imminence of use’’, and what is meant ther eby in the publie utility field, appear repeatedly in decisions: of the Interstate Commerce Commission. See **State- ‘ment of Methods’, Texas Midland ease, 75 I. C. C. 1, 162. See also Chicago, B. & VY. R. Co., 134 I. C. ©. 1, 38; Virginian Ry. Co., 141 I. C. C. 595, 634; Chicago and I. W. R., 149 1. C. C. 219, 225; Pennsylvania R. Co., 22 Val. Re “p. 1, 119; Pitts. . ; | ; $- ; 4 & | : DPT Rr ee ets —- _ — — — —_ ey oe ntti es Annies”. al ao ait ine a 70. burgh C. C. & St. L. Ry. Co., 24 Val. Rep. 1, 54; ‘New York Central R. Co., 27 Val. Rep. 1, 48. With respect to spare plant, appellants allege at pages 44 to 48 of their brief that the system is vague as to property to be classified under account 100.1, ‘*Telephone plant in service’’, and then cite in- stances of switchboards consisting of large sections some of which often are unused ; underground con- duit consisting of a number of ducts only a part of which initially contain cables; the cables them- selves consisting of many pairs of fine wires some of which are spares; and buildings initially con- taining vacant floor space. Appellants also criti- cise the statement of the Commission’s Chief Ac- countant in his affidavit (R. 481) that only neces- sary spare plant is to. be included in account 100.1. It appears that the word ‘‘used’’, as ordinarily applied in public utility accounting is so univer- sally understood that no justification exists for the narrow interpretation which appellants choose to place on the language of the texts of the accounts of this Commission’s system, or of the broad: un- limited interpretatiqn which they themselves would make. The classification of spare plant, under this Commission’s system,.was discussed by represent- atives of the Federal Communications Commis- sion and of the earriers at a conference held on May 16, 1935, preliminary to pronylgating Tele- phone Division Order No. 7-C. The Comnmis- sion’s interpretation of the provisions of the 7 71 Uniform System of Accounts relating to the clas- sification of spare plant, explained to the carriers at that conference, was expressed in the affidavit of Mr. W. J. Norfleet, in the following language (R. 481): : | | It is my opinion and understanding that this Commission’s system of accounts per- mits the recording of necessary **stand-by” plant in Account 100.1, ‘Telephone plant in service’ and that periodical transfers” between said Account 100.1 and Account 100.3, ‘‘Property held for future telephone use”’ will not be required by reason of sea- sonable changes or fluctuating demands for ‘plaintiffs’ services. It is also my under- standing that such interpretation was dis- cussed and made-clear at the conference between representatives of this Commission and representatives of plaintiffs and other telephone companies relating to the then proposed system of accounts for telephone companies, on May 16, 1935. Both appellants and additional appellants must be aware that regulatory bodies rarely question the distinctions made by carriers between items entered in accounts such as 100.1, 100.3, and 103 until they have occasion to inspect the carrier’s books of account and underlying data and that it is customary to accept reasonable efforts of cor- porate officials toward differentiation under a broad rule that has been promulgated where a rigid rule is not feasible. In the Texas Midland LLIN PEPE ROR RE NIP, POR MES MP TONE IN ED hea! ‘ apa OKI erytuting ¢ 72 case, previously referred to (75 I. C. C. 1, 162), the Interstate Commerce Commission, in discussing the ‘‘imminence-of-use rule’’, said: * * * If the carrier asserts that the lands were purchased in good faith, belev- ing that they would be required for carrier purposes, the presumption will be in favor of the carrier, but nevertheless the carrier must be prepared to state the reason upon which its belief is founded and if the reason is found untenable the land is classified as nonearrier. Again * * * ‘The judgment of the carrier is usually.” accepted. * * * » There is in the Uniform System of Accounts nothing arbitrary, indefinite, unnecessary, or vague. Order No. 7-C under attack is, under the rule of statutory construction, to be sustained in all of its parts when the language of any account or instruc- tion is alleged to be subject to different interpreta- tions, one of which would make the account or in- struction invalid and the other of which would sus- tain it. See Arkansas Natural Gas Company V. Arkansas Railroad Commission, 261 U. 8S. 879, 383-4; New York C. & H. R. Co. v. United States, 212 U. S. 481; Knights Templars’ and Masons’ Life Indemnity Company v. Jarman, 187 U. S. 197; Houston & T. C. R. Co. v. Texas, 177 U.S. 66. See testimony of affiants (1) William J. Norfleet, (R. 480-481, figures 1-6); (2) Robert S. Rains, . 13 (R. 491, figures 20-22); (3) John H. Bickley, (R. 508-510, and R. 521-522, figures 18-21); (4) Asel -R. Colbert, (R. 528-529) ; and (5) Maleolm F. Or- ton, (R. 537-538, and R. 538, letter A.). The District Court did not err in holding said. provisions valid. | V THE PROVISIONS OF ORDER No. 7T—C or THE TELE- PHONE DIVISION OF THE FEDERAL COMMUNICA- TIONS COMISSION, CHALLENGED BY THE APPEL- LANIS, are SEPARABLE FROM THE OTHER PRovi- SIONS OF THE ORDER, AND THE ORDER, AS A WHOLE, Is Not Votp Becausk or ANY ILLEGALITY OF ANY oF ITs PROVISIONS The court below held (R. 581-2) that the failure of Telephone Division Order No. 7-C to make spe- cifie provision for depreciation of the classes of depreciable property, the original cost of which is included in account 100.3, ‘‘Property held for future telephone use’’, was unjustifiable; and con- demned the provisions of paragraph (3) of provi- sion (B), under instruction 21 (R. 108-9), relating to the accounting for contribut ons made to prede- cessor utilities for construction and acquisition of telephone plant subsequently acquired by appellants. | With respect to accounting requirement for de- preciation of property held for future use, it is the duty of the Commission alone to supply the remedy — for the discrepancy if there be anything lacking under the ruling of the court. Instruction 21 (B) (3), condemned by the trial court, can be lifted bodily from the system and the completeness of the system will remain unimpaired. Section 220 (a) of the Communications Act of 1934 covers accounts, records, and memoranda; (74) 79 and the system under consideration extends to ‘original entries’’ or to books ‘fof evidential char- acter’, as did the system upheld in the Kansas City Southern case, supra, and the system requires the carriers to keep records of particulars and books of general entries. (See instruetion 2 (R. 97).) Surely such provisions should not be annulled. . The Uniform System of Accounts contains many accounts and instructions preceding the accounts aud appearing as dir®ctions under the accounts, as, for instance, provisions (B) and ¢C), stated under account 1004, **Telephone plant acquisition ad- justment*” (R. 123-4), and (B), stated under ac- count 100.5, ** Property held for future telephone use’’ (R. 123). Many of the instructions passed unattacked in the suit. Under the law, the Federal Communications Commission itself is empowered to construe and apply its system of aecounts, but if the court ex- ercises Jurisdiction invoked for the suppression of any of the accounts prescribed by the system, then the court no doubt will look to the provisions of the system, which are in writing, to determine what each provision means and what the relation of any provision is to all other provisions of the system. If the question of the separability of the system of accounts is a mixed question of law and fact, then it should be noticed that, as said in West Ohio Gas Co. v. Public Utilities Commission of Ohio, 294 U.S. 63, 70, ‘this court does not sit as a board of revision with power to review the action of admin- _ ’ » » iaiiieaiaetceaesesittiaaeeeeeeall a ; o . 76 istrative agencies upon grounds unrelated to the maintenance of constitutional immunities’’; and it ‘ should also: be noticed that the Commission’s affi- ants testified that the system is separable. See affidavits of Messrs. Norfleet (R. 483-484, VIT), Rains (R. 492, figure 25), and Orton (R. 542. figure 8). | Neither the law controlling different coordinate branches of government nor that comity which ought to and does exist between the branches of government ‘countenances the suggestion of appel- lants that because of their attack upon a few pro- visions of the accounting system the entire system should be enjoined, set aside, annulled, suspended, and thus wholly obliterated. | The District Court did not err in holding such provisions to be separable. , CONCLUSION The presumption is that the decision of the trial | court is correct on the Statement of Points (R. 600); and the burden is on the appellants to sus- tain their points. That burden has not been dis- charged either in part or in whole; and the decision of the trial court should be affirmed. Respectfully submitted, HAMPSON GARY, General Counsel, FRanK RoBERSON, Assistant-General Counsel, W. D. HumpHrey; Assistant Counsel. + U.S. GOVERNMENT PRINTING OFFICE: 1936 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386010_0087%3A07. Public record. Not legal advice.