Appendix — FPC v. United Gas Pipe Line Co.

Supreme Court brief1967

Ask Donna

What actually matters in this document.

Text

ps Segre Court of the he PoE s

> Oorosze Tznm, 1966 FILED |.

woe "No. ta7>«Y «OCT 2.01966

: Feperan Powzr Ooraasx0f, JON FODANIS, CLERK

Ww. vs P) | o

Untrep Gas Prez Linz Company, Narurar

Gas Prez Linz Company or AMERICA, AND -

Taxas Easteen TransMission Corroration,

, . Respondents.

-* No. 128

} Memenis lous, Gas anp WATER 7

ena i

- Unrrep Gas Pree Love Compan, Natura

Gas Pres-Line Company or AMERICA, AND

pee Texas Eastern TransMission CoRPoRATION, —

ms ; _ Respondents. | \

On Waits or Cre TIoRarr To THE Untrep States

Court oF APPEALS FOR THE F'rTH Cmourr

APPENDIX TO BRIEF FOR ae

_ UNITED GAS PIPE LINE COMPANY 5

Se6Cee3xeossSs—sesSSSSS Se

Of Counsel: . ;

W. O. Cram 2 THomas Fusrcnie:

General Counsel ===—-—>—s« 2025 First City National

P. O. Box 1407 ; Bank Building.

Shreveport, La. 71102 Houston, Texas 77002 si

;- x W. Kose Attorney for United |

-, ' 2 Rector Street | Gas Pipe Line Company -

New York, N.Y. 10006 . | ah Pe

Lyyw R. Coreman

2024 First City National |

Bank Building .

Houston, Texas 77002 . °

October 20, 1966

o —— inc., :-, MOUSTON por,

. b of

2 ; < é.

¢ . ? eo. =

iad - A ti

; INDEX.

APPENDIX Aj; Statutes and Regulations ...vininm

APPENDIX B: United Gas Corporation aid Subsidi- _

* aries, Federal Taxable Income (or

Loss), Consolidated, and Separate Re-

turn Basis, 1957-1961 .

APPENDIX C:.FPC Opinion 396, Cities Service Gas

Co.. (1963) ” FPO 158

. APPENDIX D: Taxable Net Denes of Union Produc-

ing Company . tye

: >

ad -

. ~

"Ths

“Je

APPENDIX A

: eneeigi from the Natural Gas Act, :

. _ -the Internal Revenue Code and Regulations

_ “NATURAL GAS ACT ye

Section 1(b) The | provisions of this ont shall apply to

the transportation of natural gas in interstate commerce,

to the sale in interstate commerce of natural gas for resale —

_ for ultimate public.consumptien for domestic, commercial,

‘industrial, or any other use, and-to natural-gas companies

engaged in such transportation or sale, but shall not apply

to any other transportation or sale of natural gas or to the-

"local distribution of natural gas or to the facilities used for

such distribution or to the production or gathering of

~ natural gas. [52 Stat. 821 (1938) ; 15 U.S.C. $717 (1946) ]

CODE (26 UsC 1 et seq):

_ TAX ON CORPORATIONS en |

oh. Tax imposed . em

(a). Corporations in general.— A tax is hereby imposed

for each, taxable year on the taxable income of every cor-."

poration. The tax shall consist of a normal tax computed.

. under. subsection (b) and a surtax — under sub-

: section ‘(ae i ees

. (b) Normal taw.— The normal tax is equal to the fol-

lowing percentage of the taxable-income: |

- (1) 30 percent, in the case of a taxable year begin-

“ning before January 1, 1964, and

(2) 22 percent, in the case of a taxable year begin-

ning after December 31,1963. é |

centage of the amount by which the taxable income exceeds —

the surtax exemption for the taxable year: ~ ::

(1) 22 percent, in the case of a taxable year begin-

‘ning before J neal 1, —_ |

a ae

oy “* 2a ° me

(2) 28 percent, in the case of a taxable year begin-

~ ning after December. 31, 1963, and before wera 1,

1965, and )

(3) 26 percent, in, the case of a taxable year begin-

ning after December 31, 1964 (as amended by: 1964

Revenue -< 28 USCA § 11, 1966 Supp.) —

‘See. 172 [1954 Gots), (a) Dgpvction. AtLowEp. — There

shall be allowed asa deduction for the taxable year an-

amount equal to the aggregate of (1) the net operating loss -

:carryovers to such year, plus (2) the net operating loss

' earrybacks to such year. For purposes of this subtitle, the.

term “net operating loss deduction” means — deduction |

allowed by this subsection.

(b) Net Orzratine Loss CaRrRYBACKS AND Cannyovens, - _

(1). YEars TO WHICH L088 MAY BE CARRIED, — A. ar

operating loss for any taxable year a after De-

cember 31, 1957, shall be —

(A) a net operating loss cartyback to each of: the

3 taxable — oe the taxable year of such

' _ Joss, and :

(B) a net operating loss carryover to each of ie

6 taxable years tologies the taxable year of such

loss.

(2) Anounr OF CARRYBACKS AND CARRYOVERS. — Ex-

cept as provided in subsection (i), the entite amount .

-of the net operating loss for any taxable year (here-

inafter.in this section.referred to as the “loss year”)

_ Shall be carried to the earliest of the 8 taxable years

to which (by reason of subparagraphs (A) and (B) ©

of paragraph (1)) such loss-may be carried. The por-

tion of-such loss which shall be carried ‘to each of the

_ other 7, taxable years shall be the excess, if any, of

-* the amount of such loss over-the sum of the taxable

_ 3a

» jineome ‘for side of the prior taxable years to which

' guch- loss may be carried. For purposes of the pre-

ceding sentence, the taxable i income. for any such _

taxable year shall be compufed—

' (A) with the modifications. specified i in nilisistlgin

and .

(B) by determining the amount of the net ict: }

ing loss deduction without regard to the net operating:

loss for the loss year or-for any taxable bce —

_ after,

and the taxable income so computed shall not asal con- .

_ . Sidered to be less than zero.

| (c) ‘Ner Operatic Loss Deikind, «es purposes. of

this section, the term “net operating losg” means (for any

taxable year ending after December 31, 1953) the excess

of the deductions allowed by this chapter over the gross —

income. Such excess shall be computed with the modifica- neu

tions specified i in subsection: a

"$1508, [1964 Code] i

; the term “regulated public utility” means —

sale of —

(i) electric energy, gas, water, or sewerage

‘disposal services, or

ereph (C)) on‘an intrastate, ees, ye

is) .

_(d) other than paragraphs (1), (4), and d (6) thereof;

(1). In ouwzzat.— For purposes of subsection (b), |

(A) A corporation engaged i in the furnishing or

: (it) transportation (not inelnded in om |

ea Pd % > 1

SS :

te <

. °

foe . . ti aa < ee ie oie brie ty Pe . a " 2 i

Le te Sige Ge ay rang

' or interurban electric railroad, on an intrastate,

municipal, or suburban trackless trolley system, -

' or on a municipal or suburban bus system, or

‘(iii) transportation (not included i in clause (ii))

by motor vehicle —

if the rates for such furnishing or sale, as the case.

may be, have been established or approved by a State

or political subdivision thereof, by an agency or instru-

mentality of the United States, by a public service or ©

public utility commission or. other similar body of the

. District of Columbia or of any State or political sub-

division thereof, or by a foreign country or an agency

or instrumentality or political subdivision thereof.

(B) A corporation engaged as a common carrier in

the furnishing or sale of transportation of gas by pipe-

line, if subject to the — of the Federal Power

Commission. ,

. REGULATIONS — 26 OFR: ~

§ 1.1502-15. Liability for tax.—(a) Several liability

' of members of affiliated group. Except as provided in para-

-graphs (b) and (c) of this section,.the common parent

corporation and each subsidiary, a member of the affiliated

group during any part of a consolidated return period, shall

be severally liable for the tax (including any deficiency in

respect thereof) computed as provided in § 1.1502-30, and |

‘for any addition to the tax computed as provided in § 1.1502-

49 for underpayment of ——— tax for the consolidated |

‘return period.

§ 1.1502-30. Computation of san Se (a) General rule.

In the case.of an affiliated group which makes, or is required

to make, a consglidated return for any taxable year, the

- ew

OI een og

tax liability of each corporation for the period during such.

"year that it was a member of such group shall be computed, -

subject to the provisions of paragraph (b) of this section,

upon the consolidated taxable income and the consolidated

taxable income plus the aggregate of the deductions of the

several affiliated corporations allowable under section 242,

or, in the case of the taxes imposed by section 531, section

541 (except as provided in paragraph (b) (4) of this sec-

tion), and section 802, upon the consolidated accumulated

taxable income, the consolidated undistributed personal

‘ holding company income, the consolidated life insurance

company taxable income, the consolidated life insurance

company taxable income plus the aggregate of the deduc-

tions of the several affiliated corporations allowable under

section 242, or the consolidated 1954 life insurance com-

pany taxable income, as the case may be, determined

in each case in accordance with the regulations: under:

section 1502. In the case of an affiliated group realizing

long-term capital gains and computing its tax under the

alternative tax provisions of section'1201, the tax shall

be computed with reference to the consolidated taxable.

- income, and the excess of the consolidated net long-term

capital gain over the consolidated net short-term capital

loss. The tax. imposed under section 11(¢) or section .

831 shall be increased for any taxable year for which an

affiliated group makes or is required to make a consolidated

return by 2 percent of the consolidated taxable income

(computed without regard to the deduction, if any, provided

in section 242 for partially tax-exempt interest).

+ §1.1502-31. Basis of tax computation

"In the case of an affiliated group of corparations which f

makes, or is required to make a consolidated return for any

- taxable year, and except as otherwise provided in the

regulations under section 1502, the tax liability determnied

° .

iofinw :

FR ER SE ee a ee ee ee ee ene re

a er eee Sh Oe ee ee ee ee ee ee en | ee

ee ee

. . . . _

Re ay, ee Te Te ee ty

under § 1.1502-30 shall be determined subject to the defini-

tions and rules of computation set forth in parseraghs oe

(a) and (b) of this section.

(a) Definitions — (1) Consolidated taxable i income. The

consolidated taxable income shall be the combined taxable -- |

income of the several affiliated corporations:

%»(i) Minus the sum of: . eats

(a) Any consolidated iat operating ss deduction,

(b) Any consolidated section 1231 net_loss, relating to

net losses from.involuntary conversions subject to section.

1231, and from sales or szeneneen of property — to ,

section 1231,

but not in excess of 5. percent of the consolidated taxable

- income computed without-regard to such consolidated chari-.

table contribution deduction, any deductions under part .-’

‘VIII (section 241 and following, except § séction 248), sub-

’. chapter B, chapter 1 of. the Code, any “consolidated net

. operating loss carrybacks, and any deduction under ‘sec-:

tion 922 (special deduction for Western Hemisphere trade |

corporations),

(d) Any consolidated dividends received deduction,

(e) -Atiy consolidated section 922 deduction, |

(f); -Any consolidated section 175 deduction, but not in.

excess of 25 percent of the consolidated section — gross

f ineome, bet ,

(g) Any consolidated section 247 ‘geiustin,

“%h) <Any consolidated section 582(c) net wary and.

(i). [Reserved] ae: .

— (3). Any consolidated section 181 dsduction, :

| {ii) Plus any consolidated net capital gain, or |

* >

L&e

- (iii) . Minus, in n the case ner an afliliated group induding

as members one. or more corporations subject to the, tax |

imposed - by’ section ‘831, the combined additional: capital

‘loss deductions of such corporations authorized by ‘section

832 2 (c) (5) (but in an amount not in yin of the consoli-

~ dated net capital loss). |

- §1.1502-81(b). Computations. In the case ‘of affiliated

egrporations Which make, or are required.to make, a con-

solidated return, and except as niet ces — in | the

reigulations under section 1502:

(1) Tawable income. “The taxable snsbaie of each cor-—

poration shall be computed i in accordance with the provi-

sions covering’ the determination of taxable ineome of :

separate corporations, except: 4

(i) There shall be eliminated unrealized Site 0 and °°

_ losses in transactions between members of the affiliated . .

group and dividend distributions from one member

of the group to another member of the group (referred pate

to.in the regulations under ‘section 1502 as inter-

company transactions);

(ii) No net scsi, loss deduction shall be taken

“into. account ;, .

(iii) “No capital gains or * losses shall be taken into

account; — F

. (iv) There shall be Ponca ee all gains and losses |

from involuntary conversions subject to section 1231,

and from sales and exchanges of property subject to

section 1231 ;

(v) In the siianeiithel of the edinshion under sec-

tion 171, relating to amortizable. bond premium, there

- shall be disregarded the bonds of one member of the

group owned by another er of the group during

the taxable year;

*(vi) In the computation of the taxable income of

- a corporation for the taxable year in which it became

the common parent’ corporation of the affiliated group

filing a‘ ‘consolidated return, the aggregate deductions

‘of such corporation for such year otherwise allowable

in exces#of the gross income of such corporation for

such year shall be excluded to the extent that such ©

excess is attributable to that portion of such year pre-

ceding the date upon which such corporation became

the common parent corporation of the group. Any

amount excluded under this paragraph shall, to the

extent that it constitutes a net operating loss within -

the provisions of section 172 or a net capital loss

within the provisions of sectidn 1222, be considered as

a net operating loss or a net: capital loss, as the case ~

may be, separately sustained by such corporation and

subject to the ‘provisions of paragraph (a) (3) (ii) or

(11) (ii) of this section ; |

(vii) In the case of a corporation hich became a

member of the affiliated group after January 1, 1954,

common parent corporation or subsidiary, as the case

‘may be, allowable deductions shall be determined sub-

ject to the qualifications prescribed in eles

(9) of this paragraph;

(viii) No deductions under section 170 with adults

to charitable or other contributions shall be taken a

, Rabies

_ ° (ix) In the cape of the deduction provided i in sec-

. tion 615 (relating to mine exploration expenditures),

the allowable deduction shall be determined subject

to the qikttienthons prescribed i in subparagraph (12) ©

' of this paragraph ;

(x) In the case of a distribution of inventory to

which section 311(b) is applicable, or in the case of a

distribution of property to which section 311(c) is ap-

plicable by one member of the group to another men- |

ber of the group; the gain recognized under such sec-

tions shall be eliminated; ;

(xi) No deductions nbn section 243, 244, 245, or

247 (relating to deductions with respect to dividends

received and dividends paid) or under section 922 (re-

lating to the special deduction for Western Hemisphere

trade corporations), shall be taken into account;

(xii) No deductions under section 175 (relating to

soil and water conservation expenditures) shall be

taken into account by a member of an affiliated group

_ to which the consolidated section 175 — is

applicable;

(xiii) In the case of a bank: for taxable years begin-

ning after December 31, 1958, there shall be disregarded

all gains and losses from sales and exchanges of diel

erty described in section 582(c) ; and

(xiv) ‘No deduction under section 181 (relating to

deduction for certain unused investment credit) shail

be taken into account.

‘halsiillaiala profits and losses which have been realized

by the group through final transactions with persons other

than members of the group, and intercompany transactions

which do not, affect the consolidated taxable income shall

not be eliminated. For the purpose of this subparagraph,

gain includible in income pursuant to section 357(c). with

respect to transfers of assets other than capital assets and

eon

. <

es Ca.

‘other than assets to which section 1231 is applicable, and

.gain includible in income by reason of the ‘application of ~~

. paragraph (a) €1) (iii) of §1.1502-37, shall not be .elimi-

* nated.’ For the purpose of ‘the regulations-under section Ks

. 1502, a transaction not involving a‘sale or exchange of a:

- capital asset or-of ‘property subject to the provisions of

section 1231 shall not be considered an intercompany trans- -

action if such transaction. occurs in the regular course of

\ the trade orbusiness of the members of the group and if =

‘such members: adopt, ‘with the. consent ‘of the Commissioner .

- and. subject to such conditions as he deems’ proper, & con- |

sistent_accounting practice of taking into account in the

computation of consolidated taxable income the gains and

. losses ‘reflected i in such transactions: As used in this para-

graph, the terin;“taxable income” includes the case in which .

the allowable dednetions of.a member (not including any’

‘net operating loss deduction) excéed its gross income. For

purposes of section 593(b)(2) (relating to addition ‘to

reserve for bad debt3), taxablé-income of an organization

to which section 593 applies. shall be: ‘egmputed as if such °

organization filed a separate return for ‘the: taxable year.

- (2) Qther computations on separate basig> The vari-.

ous other computations required by the regulations under eo

section 1502 to be made by. the several affiliated corpora-

tions shall be made in the case of each such corporation in’

the same manner and under the same conditions as if a

'- separate return were to be filed, but with the sane

sexceptions: © . . 3.

(i) Taxable income. ‘The taxable income used in

* any ‘such eomputation shall bé the taxable income of

the corporation determined in accordance with the pro-'

“visions of this section. ‘

(ii) Dividends received. In the computation of the

* dividends received, there shall be excluded all dividends |

received tux other —— of the affiliated ‘group,

a ai “ 3 , : e ae

n ° :

‘

| taxable income shall apply.

a ad

a .

‘lla me eae Sab fee

(iii), ‘Capital 9 gains and. losses. Capital gains an’

. losses, short-term capital gaits and losses, long-term

pital gains and losses, and the additional capital loss

“Geduition authorized by section 832(c) (5) § shall be de- $.

termined. without regard to: — ;

(4) Gains or losses arising in bieieiipaay

transactions (other than gains described i in section |

357(c)) ahd gains recognized to the distributing cor- °. -

. ‘poration pursuant to section 311(c) by: reason’ of

distributions by one member of. the group to another -

member of the group,

- (b) Gains of losses:frém involuntary conversions

~~ and from. sales. or exchanges of property subject to ..

the provisions of section 1231, ,

(ce) The net capital =~ carryqvers apesbied in

section 1212, ~

(dq) In the case 2 of a corporation whigh bitame a

member of the affiliated group subsequent: to Janu-

ary 1, 1954, common parent corporation or subsid-

iary, as the case may be, capital losses to the extent

_. disallowed pursuant to the provisions of subpara-

graph (9) of this paragraph, and

{e) “In the case of a bank, for taxable years esis |

ning after December 31, 1958, gains or losses from.

"~ gales or exchanges of property described in section

‘* 582(c).. Faas | Rae

_ (iv) Net operating loss. In the sininititieen of the

net. operafing loss, as defined in section 172, the provi-

-sions of this section pertaining to the determination -

| (¥)- Dividends paid, In the sitniphaiion of divi- sw

_— paid,.there shall. be excluded all dividends paid 5

ee eer

e _

12a

=, ae ‘one mamber of the. group .* sein except as

provided i in paragraph (b)(4) of §1.1502-30.

(vi) * Federal income taa. In the computation of

the Federal income tax, there shal] be used the con-

solidated tax, or a proportionate part thereof, if the

-tax payable is properly computed’ on a the rs of the

- + .gonsolidated return.

§.1.1509-34. Sale of stock; iain tai Aeheenalitng iesia oe

loss.— (a) Scope of ‘section. This section prescribes the

basis for determining the gain or loss upon any sale or other

disposition . (hereinafter referred ‘to as “sale”) by a cor-

poration which is (or has been) a member of an affiliated —

group which makes (or has made) a consolidated return’

for any taxable year, of any share of stock issued by another

member of such group (whether issued before or during the .

period that it was a’ member of. the group and whether

issued before, during, or after the taxable year 1929), and

held by the selling corporation during any part of. a@ period

_ for which a consolidated return is. made or required under

‘the regulations under section 1502..For the basis in the case .

of a sale of bonds, see § 1.1502-35. -

(b) Sales made. while selling corporation is sania of. .

affiliated group. - ¥f the sale is made within a period dar-

ing which the selling corporation i is a member of the afiili-

ated group, whether or not during a consolidated return”

eriod, and whether or not, as a result of such sale, the

issuing corporation ceases to be a member of the group,

the basis shall be determined as follows: |

(1) The aggregate bases of’ all shares of stinate of the

| issuing corporation held by each member of the ‘affiliated

group (exclusive of the issuing corporation) immediately

prior to the sale, shall be determined separately for each

13a. : |

member of the group, and adjusted in accordance with the

other, provisions of .subtitl&A of the Code, but without

_ regard to any adjustment under the last sentence of sec-

tion 1051 relating to losses of the i issuing corporation sus-

_ tained by such corporation. after it became a member of

the group. |

(2) From the combined aggregate ree as determined.

in subparagraph (1) of this ‘paragraph, there shell be.

deducted the sum of —

(i) All losses of such issuing corporation sustained <_

during taxable years for which consolidated incqgme

tax returns -were made or were required (whether the

. taxable year 1929 or any prior or subsequent taxable

year) after such corporation became a member of the

affiliated group and prior to the sale of the stock to

the extent that such losses could not have been availed -

_ of by such corporation as net loss or net operating |

- . Joss,in computing its net income or taxable income, |

as the case may be, for‘such. taxable jyears if’ it had

* made a separate return for each of such years,

‘(ii)’ With respect to each of such taxable years for

which consolidagpd returns were made or were required

‘ both for income and for excess profits tax purposes,

—~ _ the excess, if any, of all losses of such issuing cor-'. |

poration for such year, properly adjusted in the com-

putation of consolidated’ excess profits net income

over the amount of such losses for such‘year computed -

under subdivision (i) ‘of this subparagraph to the ex-

tent that such: excess could not have been availed of °

' by such corporation as a net operating loss in com- ,

puting its excess profits net income for such taxable

“years if: it had. made a’ separate ‘return for each of

; such — and

14a

(iii) With aitie to each of such taxable years

_ for which consolidated returns were made or were re-

_- quired for excess profits tax’ purposes only, all losses

of ‘such issuing corporation for such year, properly:

adjusted in the: computation of consolidated excess

profits net income, to the extent that such losses could

not have .been availed of by- such corporation as a

net operating loss in computing its excess profits net

’ incame.for. such taxable years if it had made a gepa-

rate excess profits tax return for each of such si

reduced by any. losses of the iesuing corporation appor- |

- tioned under this section to its stock sold or otherwise dis-

posed ‘of in a prior transaction, disregarding any transac-

tion between members of the affiliated group during a con-

‘solidated income or excess profits tax return period which

did not constitute a partial liquidation of the issuing. cor-

poration. For any taxable year in which the, group sus-

tained: a consolidated loss not availed of in prior or subse-

quent years as a deduction under net loss or net operating |

loss provisions, the amount deducted under this subpara- .

~~ graph shall be further reduced' by an amount equal to that

proportion of such consolidated loss which the loss of the

issuing corporation for the year in which such loss was

sustained bears to the aggregate losses of the members of

the group for such year. S mn

(3) The sum-of the aggregate bases of all shares of

inl after making the deduction under subparagraph (2)

of this paragraph, shall then be apportioned among the

members of the affiliated group which hold stock of the |

_- issuing ‘corporation, by allocating to each such member that

proportion of the sum of the. aggregate bases so reduced

_ which the aggregate basis of the stock in the issuing cor-

poration held by such member bears to the sum of the —

aggregate bases. ~

P .

. Y .

AP PANE LAND ea tne stew we age AE rate

15a

' (4) The saeieieaie basis as determined under iitiniien-

. evant (3) of this paragraph for each member of the affili-

ated group shall then be equitably apportioned among the :

_ several classes of stock of the issuing corporation held by i

such member according to the circumstances of the case— -

ordinarily by allocating to each class of such stock that

| proportion of the aggregate basis which the basjs of each —

class of such stock held by it at the time ofthe sale i is to

the sum of the bases of the several classes of such stock

held by ite:

(5) The basis of oni share of stock of each iia held .

by a member of the affiliated group shall then be determined: .

dy dividing the basis apportioned to such class under sub-

paragraph (4) of this paragraph by the total number of

shares of-such class held by it.

. he ® 6 .@:..

(d) Definition of “loss’’; “consolidated loss”, “net loss”,

or “net operating loss”, and “consolidated: excess profits

~ met income’. As used .1 in this section the term “loss” means

either the excess over the gross income of the igsuing cor-

| ‘poration of the sum of its allowable deductions (not includ-

' . ing any net less or net operating loss deduction) allowable

in computing consolidated taxable income or the excess over -

the gross income of the i issuing corporation: of the sum of

its allowable deductions (not including any net loss or net

‘operating loss deduction), plus the proportionate part

“properly attributable to such-corporation of the credits

relating to interest on certain Government obligations: and

dividends received allowable in computing’ consolidated

_ normal tax net income, the consolidated special class net

imcome or consolidated net income subject to tax determined

in accordance with the Internal Revenue Code of 1939 and

provisions of consolidated returns regulations applicable

to the period. The term “consolidated loss” means the ex-

16a

‘cess of the sum of the losses, separately computed, over the 7

sum of the normal tax net income, the special class net

income, the net income subject to tax or the taxable income |

determined in accordance with the provisions of subtitle A .

of the Internal Revenue Code of 1954, or the Internal

Revenue Code of 1939, or the-Revenue Act, and pursuant

. to the provisions of consolidated returns regulations appli-

cable to the period; the term “net loss” ‘or “net operating

_ loss” means the net loss or net operating loss, as the case

- may be, determined in accordance with the provisions of

subtitle A of the Internal Revenue Code of 1954, o» +t»

Internal Revenue Code of 1939, or the Revenue Act, and

- . pursuant to the provisions of consolidated returns regula- .

tions applicable to the period; and the term “consolidated

excess profits net income” means the consolidated excess

profits net income or consolidated ‘section 433(a) excess

profits net income determined in accordance with the pro-

visions of the Internal Revenue Code of 1939 or the Revenue .

_ Act and pursuant to the provisions-of consolidated returns

regulations applicable to the period.

» § 1,1502-35. Sale of bonds or other obligations; basis

for determining gain or loss. — In the case of a sale or

. other disposition by a corporation, which is (or has been)

a member of an affiliated | group which makes (or has made}

a consolidated income tax or excess profits tax return for

a _ any taxable year, of bonds or other obligations issued or ©

incurred by another member of. such group (whether or not

| issued or incurred ‘while it was @ member of the group and

~ whether issued or incurred before, during, or after the tax-

‘ able year 1929) ‘and-held by the selling corporation during

any part of a period for which a consolidated return is

made or required under the regulations under section 1502,

the basis of each bond or obligation, for determining the —

gain or loss upon such sale or r other — determined

bien a Fela bacatin Te doit

‘17a

"im accordance with the other provisions of subtitle A of the

Code, but*without regard to any adjustment under the last,

sentence of section 1051, shall be decreased (except as

otherwise provided in this section) by the ‘excess, if any,

. of the aggregate of the deductions computed under para-

_ graph (b) (2) or (c) of §1.1502-34 over the sum of the

aggregate bases of the stock of the debtor corporation as

- computed under paragraph (b) (1) or (e) of § 1.1502-34 as

the case may be, held by the members of the group. The

adjustment with respect to so much of such deductions as

_ is based upon losses sustained during the taxable year 1929

' and subsequent taxable years for which. the last day pre-

_ -geribed by law for the filing of the return fell on or before -

° .March 1,°1945 (the date on which Treasury Decision 5441

was filed with the Division of the Federal Register), and

availed of on consolidated returns filed for such years shall

be made only in those cases in which the sales or other dis-

position of such bonds or ‘other obligations resulted in a

~ Joss. See also § 1.1502-40 relating to disallowance of loss

' upon intercompany bad debts.

CS aa ieee =

4 — Si

: ‘ SS

TYSON I —

> a

= N . H

NE ‘mis , .

if Wr

|| é +S ~| 4

aS ‘ E

= Ww)

~ A ae oe |

= * , fe Ne me -

n ¥ N *S me = cert

\ AN : SE ie {—

: : Ne + \

EY ee esc

Gh SN: CN |

; rT we Na Nal fv oT. —

HH SER eet = same

Wyss 8 = SN ee

a1 + SNES t +

ae WW ING ;

x yy, N’ “Tw 7

~~ ath L8 <

>» —ik SY i X .

Be NE oe ee

SK NE Bk. : ; iy

‘ N= SIR PERS SFR A=

Nic yu -o-ah} SESS -

= “ttt iN

° ; a : > P met

, hy | SY x

\ oF oa \" X P

Ta | WS aN z

Sie! sl ele2iclelelalsa ai a] wl el el el a. s ail al el

22}

LIZ.

. © a ~ P

"f SOF ROR I RET LD MOR RR Re Bes meer O 2

‘ ey

3 ot | x :

1/ A

WA V7Ke

“Anay e2

[

2°

Os Hp Hb:

7 Ks

2H 0

Hitt

feyeer a7

4444

Ea nanan

a poe Seatac al SRO REID 4

~ ges ae ship: oo geeeyenne:

me =e. % ASrar

ae >

Leena {SRE TET Hes TE oo -

Schaal ai eae - meer PERS ON Nae

wie eS Fe oe ea ie z 235 es +

° . ‘ ‘ °

APPENDIX Cc’

: << STATES oF AMERICA

eae ee FEDERAL POWER COMMISSION

_ Before Commissioners; Joseph C, Swidler, Chairman;

; Howard Morgan, L. J. O’Connor,

* . dr., Charles R. Ross, and ;

Harold C, Woodward. °

Se at,

Orrms Sznvicz Gas Company } Docket No: G:18799

Ormon No. 39630 FPC 153

OPINION AND ORDER DETERMINING TAX

ALLOWANCE, DISALLOWING RATES —

(Issued July 15, 1963)

ROSS, Commissioner:

come taxes in the amount of $7,055,981, calculated at the ©

1 This Proceeding involves a locked-in Period because Gas Com-

pany made a further filing j ing i os j :

_- RP62-1, which rates became effective on December 23, 1961,

Tung for Rate Schedules I-1 and I-2 which became effective

2¢

specifically reserved for future determination the issue of

the proper amount of federal income taxes to be allowed

Gas Company in this proceeding and provided for refunds -

as a result of a final order on the tax question.

Gas Company is a member of the Cities Service system.

The parent corporation is Cities Service Company, which,

through its wholly owned subsidiary, Empire Gas and

Fuel Company, owns all the outstanding stock of Gas Com-

‘pany and, altogether, directly or indirectly owns the, stock

of 37 corporations. Among these Gas Company is the only

company engaged in the interstate transportation and sale

_.of natural gas. The other subsidiaries are engaged in a

wide range of petroleum activities: Subsidiaries explore

for and produce oil and natural gas, not only domestically

in Oklahoma, Louisiana, Texas, Illinois, Kansas, Missis-

sippi and New Mexico, but also in the offshore argas of __

- the Gulf of Mexico. Other.subsidiaries produce petroleum

_ products in Canada, Columbia, Venezuela, Peru, Arabia

~.and the French Sahara. Still other ‘subsidiagies own and

operate . refineries, oveangoing oil =— railroad tank

cars, and an office —_—

The parent has filed a gemtiinian tax return for‘a num-

ber of years and Gas Gompany has been included in the ..

consolidated return except for the years 1950, 1951 and

52: Under the Internal Revenue Code ( Sections 1501- oO.

- hoa) when a consolidated return is filed, all corporations -

“whose stock is owned 80 percent or more by the Parent

Company, must be joined in the consolidated return. In the

return the losses of any company can be set off against

the taxable income of ‘other companies in the group. A net

loss in any year can be carried back to the three preceding

yéars or. carried forward to the succeeding five years (Seé-

tions 172 of the Code). The tax rate on the ———

S::

™

; :

return is 54 percent, insteadvof the usfal 52 percent for a

Separate corporate income tax return, but the 2 percent

penalty applies only to the amount. of the consolidated

taxable incéme which exceeds the taxable income’ that is

derived from a utility, such as Gas Company ,(Section 1503

of the Internal Revenue Code). © a

‘The Parent Company has allocated the Sarden of the |

consolidated tax payments among the various subsidiaries-

on the following basis. The regulated companies, such as

the Gas Company, were charged 52 percent of ‘their net

taxable income while the- remainder of the- consolidated

tax, if any, was then allocated among ‘the nonregulated

subsidiaries showing a profit in proportion to their respec-

tive taxable incomes. Their intrasystem methods of alloca-

tion, of courae, cannot be the basis of determining the

amount allowable to Gas Company as an operating expense

in a rate case.’ be

The staff argues that in computing an ‘allowance for .

federal income tax to be included in the cost of service.

the Commission should adhere to its interpretation of ‘the

doctrine of actual taxes payable. When any company par-

ticipates in the filing of ¢ consolidated tax return, it should _

also participate in any saving generated whichever com-

pany is responsible for’ the rSaving. The important fact,

the staff says, is that Gas Company joins in the Parent ‘

Company’s consolidated tax returns, so that the taxable

income or loss becomes a “fused mass” in which each dollar

is indistinguishable from any other dollar. The filing of

the consolidated tax Teturn, the staff adds, does not pro-

duce any separate income tax liability on the taxable income

of the Gas Company, but instead, produces a tax liability

- for the whole group. ’ a,

' O¢e

“ 4

. 4c

As a result-of thése views the staff did not apply the

. statutory rate to Gas Company’s taxable income, but rather

employed a consolidated effective tax rate of 10.53 percent

for the purpose of. determining the proper allowance for

federal income taxes in Gas Company’s cost of service. This .

tax rate-was derived, in essence, by dividing the consoli--.

dated tax paid by the Cities Servive system by the total

taxable income of all the profit making affiliates computed

separately for the’years 1957, 1958 and 1959.? By this

taethod the staff.computed an effective tax rate of 23. 3.92

percent for 1957, 0 pércent for 1958 (where there was a con- .

solidated tax loss), and 7.67 percent for 1959. It avetaged oe

these three figures to: obtain its effective tax rate of 10. 53

percent which it applied to the Gas Company’s income in

the test year 1958 to obtain a tax allowance of $785,565.

Cities Service argues , that the tax rate ‘actually payable (

on the Gas Company’s stipulated: return is 52 percent. It

says that taking into account the carry-back of losses, there -

’ ~ are no tax savings which can be attributed to the Gas Com- —

pany’s inclusion in the consolidated return. ‘Furthermore,

it contends that it is the Gas Company’s rates which are in

issue here not the rates for the or gasoline, or petro-

chemicals, or the other products p uced and sold by the.

‘companies in the Cities Service ‘system. It says that where

_ rates are being set for a utility operation, the costs appli-

cable to that operation are germane, not the costs of the ©

_ unrelated, non-utility operations. It adds that if there is

the s — who incurred the losses and not to the

2 Since the test year 1958 showed a » constiidatedoas, the Staff. used -

: - the three year period in order to reach a more representative .

7 result. : | .

any saving from the non-utility operations they belong to.

ratepayer, who hin paid no obligation of the non-jurisdic-

tional subsidiaries and has not contributed to their losses.

The staff’s proposal, the companies say, would take away

‘from the investors a Portion of the incentive provided by

* Congress to: ‘encourage exploration for oil, domestically

‘and abroad, would put the company at a competitive dis-

advantage with other oil companies, and would -penalize

the Parent Company for its form of corporate organization.

Cities Service claims that the staff’s consolidated effective’ -

. tax rate is a clear deprivation of property without due

process: of law, because it takes the benefits of the large .

tax deductions from the -jurisdictional companies and

passes them along to the gas customers i in- ‘the form Tr.

reductions. woe

-In his decision isshel April 23, 1962, the Examiner.

agrées with Cities Service. He holds that the staff’s posi-

tion is basically wrong because it would thwart the true

congressiondi intent of the tax law permitting the filing

of a consolidated return, which was to encourage holding

- companies to expand their overall businesses for the better-

_ ment of the national and international economy. He cannot

‘ gee the justice f permitting Gas Company’ s customers to

receive. what M cose a windfall from losses occurring -

_ in bdsinesses pnrelated to that of the regulated natural gas.

‘company merely because ’ Gas Company and the corpora- ~

tions having the losses happen to have a common corporate _ Pf

owner. Thé Examiner adds that the regulated businesses ~

should not héve the right to take away from the non-regu-

lated entity any part of the losses it utilizes for tax pur-

poses. The Examiner thinks that, if driven to it, the Parent

Company could rearrange its system of corporations in such,

manner as to eliminate tax losses, and there would fen

be no tax saving to allot to the gain companies, . including

, Gas Company. Exceptions were e filed by the staff and a

| a

: large Municipal Qicup* which had intervened an the i ing

is before us for decision: = _¢_

The authoritiés do. not. give us a otter answer to: the

question of whether the tax allowance: for ‘the regulated

company should take into account the “losses: of affiliates.

Some authorities appear to support the “actual taxes” con- ;

cept as advanced here by the staff. City of Pittsburgh v.

Pennsylvania PUC, 128 A. 2d 372, 385-387 (Pa. Super. Ct.

1956) ; Re New Jersey Power & Light Co., 9 N.J: 498, 89

: A. 2d 26, 41 (1952). Other authorities eliminate the losges .

. lof affifiated companies or“of separable operations of the

same company. Southern Union Gas Co. v. New-Mewico

PSC, No. 31074 (D. Sarita Fe County, June 9, 1961) ; Rates

and Rate Structure, 29 PUR a) 391, 481-482. (N. Y.

P.S.C., 1938).

- The: starting point in resolving the sonsolidéted tax issue - oe

is the amount of the consolidated tax payment: This is the

. only reali cost which was incurred by Gas Company in eon- *

junction .with the other Cities Service affiliates. The task

‘is then to determine the proportion of the consolidated tax

’ which is reasonably attributable-to the Gas Company vis-a-".

vis the other Cities Service affiliates. The basic error in |

. the position of Cities Service is that it ignores this point |

and claims an ‘amount. of Federal i income taxes in Gas Coni-

pany’s cost of service on,the basis*of a hypothetical figure —

. which Gas,Company would have paid if it were a separate

company. The simple truth of the matter is that Gas Com-

pany paid no ‘Separate Federal i income tax but participated

8 Consisting of the Kansas Cities of Altamont, ‘idebiin: Chanute,

- Cherryvale, Downs, Erie, Gerard, Grenola, Howard, Iola, Mel-

vern, Meriden, Osage.City, and Perry; the Missouri Cities of.

Carl Junction, Carrollton, Carthage, Clinton, Independence»

Joplin, Kansas City, Marshall, Neosho, Nevada, € Oronogo, Pierce,

"* Platte City, Springfield, St. Joseph, Waveriy’and “Webb. City;

rsa td — of pines aan Missouri.

a a le

2 : : ie ?

‘ ° t

PORE OO Nt LE OGIO LLL LLL EG LIANG ERGO SED OLIGO SOT IEG CT IN PE ELIE LO,

. Pe Pe Ene So SIG rt Bown nn EN, r ee . oe Ses a Nt ne Aa 4 POL ak Se aes = eee Epa

. : bs : ,

. : , te een a

- in the filing of _ consolidated return with the other Cities

Service affiliates. To accept Cities Service’s position would

be to approve fixing of jurisdictional rates on the basis -

of cohverting a. hypothetical tax payment into a prudent |

|. operating expense. In effect, Cities Service argues that Gas

' . Company ratepayers should make Cities Service stock- |

' holders whole for the tax losses of nonregulated enterprises __ et

even though this means an allowance for taxes over and = |

beyond that which the consolidated system as a whole ac |

tually paid. We reject this view as neither ‘just nor reason-

. able. Tax allowances i in a-cost of service are for the purpose

of permitting the regulated entity to secure a rate which,

after taxes, will provide a reasonable return on jurisdic

~ tional investment, not to insure that other components of a

' + complex corporate system are enabled to” “cash- in” on their

. tax losses.

. However, we agree, ‘with Cities Service that the’ *funda- _—

- mental rate making principle governing oar disposition of

- | thi. issue requires a separation between regulated and

' unregulated costs and revenues, This principle controls

our allocation of other costs which are jointly inourred by

regulated. and unregulated companies, or departments with-.

in the same company, ‘and is controlling here.* If we were

to allocate the consolidated system tax return among all

Profit companies including those in whole or part engaged

>2 °° in "unregulated. activities, there would be;no sound reason

' for refusing to fix jurisdictional rates at a level sufficient

- to make up any real losses these companies might suffer.

Staff's azipconeh possesses ‘a quality: of artificiality and

‘instability which renders it unsatisfactory for ratemaking ~

purposes. In effect, staff's effective tax rate 1 is derived by

“As shown above; this principle i is sehbiiaianaa. with Cities Serv-

ice’s position that Gas Company’s tax allowance eangones be com-

maar agar oars cane el

me.

taking the Ratio Gas Company’s insoahl 5 heed to the total c

income of the profit malsing companies, and applying this

percentage to the system tax paid.. It weuld be easy for

Citieg Service to. escape from this onerous assessment by

rearranging affiliates, mergers or. intrasystem pricing ar-

rangements in‘ order to eliminate all or most of the other

'. profit entities and. thus increase the effective tax rate of

-_» the Gas-Company. Significantly, the record shows that,

Cities Service: could accomplish this result.

| There are three preliminary matters to resolve before

‘computing Gas Company’s tax allowance acéording to the

, principles stated above.. First, we must decide the period

-of time to be used in the computation. The Parent Company .

‘paid no federal income tax for 1958, the test year. If this

-test_period * were representative, we would include no- tax

allowance in Gas Company’s cost of service. However, the

tax liability of a complex such as Cities Service-for-a-single’

_ year is not apt to be representative. -As stated above, the

record shows extensive tax‘data for each of the companies

of the Cities Service system’ for the years 1957 through

1959. While. data for a longer period of time might be

‘useful: for normalization purposes, in our opinion the de-

tailed data for this three year period of.time is sufficient to

determine the tax rate applicable to Gas Company.'

_A second preliminary matter. ‘requires us to cinhipate

taxable income by normalizing deductions for accelerated

' amortization and liberalized, depreciation, consistent with.

5 We recognize that the record contains limited information for’

earlier years, i.e.,-1954 through 1956. However, thé information

- for the earlier years in this case is not sufficiently detajled ‘to be-

used in computing. the tax allowance for Gas Company in ‘the

manner determined appropriate herein; and to the extent that -

it indicated. a different: profit and loss picture may have obtained

‘earlier, the subsequent history of Cities Service indicates that

such earlier. periods could not be considered as —

for rate making —

--the taxable income of Cities Service Oil Company, "(which

> ° ~ >

9ce ;

; ; e

* : : . Pi

our treatment ‘in Aiubinia: Tensioots Natural Gas Com- .

pany, 27 F.P.C. 1180. This is done in Appendix A. How-

_ever, here as in other rate cases following Alabama-Ten-

nessee, the Order herein will be made dependent upon our

The third problem is that ‘din are deltaia compaines in

the Cities Service system a portion of whose business is

| subject to ‘regulation. The taxable income of these com- .-

panies should first be allocated into regulated and: nonregu-

; lated categories. Cities Service, however, has failed ‘to

. determination in: that proceeding regarding the propriety *-'

” of normalization for rate making purposes. In the event °”

the so called flow through approach is adopted, the rates -.

- herein approved on a tentative —_ will be Sppropriately os

- modified. 3

present any evidence upon which to make such an alloca-. ;

tion. We can,-however, make an appropriate allocation of

represents nearly 99% of the total taxable income of the

Mixed companies; i.e., those companies having both regu- :

‘lated and niaregelated income), by taking official notice ~

of. certain evidence presented in the Oil Company’s rate.

case in Docket No. G-9519, et al. This evidence (taken -

directly from the Oil Company’s own. books), shows that

6.28% of Oil Company’s S gross investment in net plant is ~

__devoted ‘to regulated activities (production, of natural

gas).¢ The data relative to the production of casinghead

gas is not. included in this figure. Inasmuch as casinghead

_ gas represents 13.51 pércent of Oil Company’s gas reve-

_ nues,’ we will adjust the 6.28 percent figure to take this .

4 "additional investment into account. Applying _ arsed

e *

s Bue +e

6 Dockets No. G-9510 et al, Exhibit 38, Schedule 3.

‘TIBID, Exhibit t 85, Schedule 3, Sheet

2 pelea Seer t are 10¢

7.13- ‘plains to Oil usein total taicable income” of

$51,252,182 Produces regulated incomé for Oil Company of

- $3,654,281.° A ‘similar allocation with: respect to Cities

Service Production Comipany results in 24.16 percent or sie

$6,464,235 of that. Company’s tax — oe to aye

lated activities.° = en

‘Hive made thises adjustments, we can now allocate the

* tax cost of the Cities Ser ce system between regulated.and ~

“‘nonregulated companies. “For the. three year period under

‘consideration, the nonregulated affiliates, including non-° ©

regulated income of Oil Company, had no taxable income.

In fact,.the record shows they had a substantial tax loss.

. It is therefore inappropriate to assign any tax liability to

this group of companies. Accordingly, we conclude that’ .

the actual tax paid by the Cities Service system, as normal-_

a is reasonably allocable among the regulated companies.

In é sum, the proper method: to be applied i in computing the —

Federal income taxes to be included in the cost of service

__ of a regulated company-where that-company has joined in

a consolidated tax return with affiliates is (1) jeparate the .

“companies into regulated and aa uaa grOupe, (2) .

- 8 This figure was obtained by siiedetlitas $29,77 5,181 (investment

' ° $n gas plant excluding casinghead) by 1. 1351. The resulting

° * figure of $33,797,808 is divided by. total plant investment of

$473,788,545 which produtes 7.18%. .-

° We wish to make it clear that a simple matmer of allocating the

taxable income of mixed companies should be used_in any future 7.

eases involving this issue. Obviously, it is administratively in- -

feasible to compute a detailed cost of servicg-for large integrated ~ .

corporations to determine one element of a regulated cbuapany's 2

cost of service. .

10 $12,970,608 or 17.46 percent of Production Company's average “

_ net investment of $14,276,476 relates to gas production, exclusive

_ of easinghead gas, Casinghead gas represents 38.34 percent of the

Company’s gas revenues, and the 17.46 percent figure adjusted .

to take this further investment into account produces 24.16

t. (Docket, No. G-9510, Exhibit 32, Schedule 2, Soot

_ percen

“and Exhibit 35, Schedule 2, Sheet 2).

erred FT TTT Ree ye ee

‘ote a

Bee hone : ilo }

; dstermine the net. aggregate thxable i income of each group, | 3

—

ad o* sd °

hy . P »

9 ;

and (3) apportion the: net total consolidated tax liability —

- over ‘a representative period of time between the two -—

_ on the basis. of their respective. taxable _incorhes; provided”

- that the allowance so cpmputed for the regulated company

—“~ p

ing purposes, if computed ona separate a basis. - mee

should bd disgHowed:

(3) Gas Company should file tariff t sheets and inake eT

groups, and among the companies in the regulated group,

shall not exceed what its tax liability would be for rate mak-

The. computation of Gas Compatiy’s nay allowance is...

computed in Appendix B. As this Appendix: shows, we. .

based this computation on the ratio Gas Company’s taxable

one bears to the total taxable income of the regulated _

‘group. This, of course, is similar to staff's approach which

we consider sencuaiiiia when the nonfegulated affiliates ;

have been excluded: ; ie ee :

+i : ts eee

: The Commision further fas Oh i ee

ae (1) —Gas- 7's proper tax allowance i 18 $5,866,847.

(2) The rates filéa by Gas Company filed pursuant to .

the Settlement Agreement and our order of March 27, 1961,.

subject to the reservation of the taxi issue are excessive and

Pal

funds in accordance ee :

‘The Commission orders: ves SAS

' (A) The rates filed by Gas eae pursuant: to the s

Settlem t Agreement and our order of March 27, 1961, ‘a

) Gas Giaianty Shall, within 45 Ai of the. date of

is order, file appropriate substitute tariff sheets to its

FPC Gas Tariffs except for Rate Schednles I-1 and 1-2

: — rates satisfactory to the Cofimission based. ¢ on

ves Hieth. vite eae multe eet on oeeet ae ee ee te ae © — _ A , _ .

SS ES TIE PRI OED YR rege RN SS Sk SY Nace Be NT LE ot CERN, Bap kta

eee nore op

ve DG ORTS NT NR:

LOL ATS AE

— a

a tax ‘gDlowanes of. $5,966,947 for the test weak; found: to le

be. appropriate in this opinion and. order. Gas Company

shall accompany its. rate filing with supporting cost. of: -

" service- and allocation’ data persented in the samé form —

and manner as that contained in the éxhibits attached to

‘the stipulation approved’in our order of March 27, 1961,_-

/ _ revisett only, to reflect the change in the allowance’ for

_,. federal inconte taxes. Gas Company shall further furnish,

"-qwith ‘its filing‘a statement setting forth the method of

pete of Fass ace thereof on all purchasers under the rate —

‘involved, intprveners in this procéeding, and.

. ae state commiésions. Comments by such parties -

‘', shall be submitted to the Commission within ten pie after

bs]

computation of such-.rates and showing the. derivation

thereof.. Gas Company shall also accompany its 5 tariff

sheets and supporting data with a cer tificate showing serv-

service by Gas 3 Company as required herein. —

sheets filed by Gas Company pursuant to paragraph (B)

above, the rates, charges and classifications set forth therein

shall become effective for the period sstettceaartl 23, 1959,

through December 22, 1961.

q,, (D) Gas Company shall, within 70 ag of the date of ;

ae this order, file with the Commission a statement showing

_ the distribution to its jurisdictional customers: of appre-

‘

Cae nage

> priate amounts to be refunded with interest at 6 percent.

- With respect. to "Rate Schedules. F-1, F-2, O-1,-C-2, E, P .

and X-5 the refund shall ‘represent the differences between

(1) the amounts collected under rates charged in accord-

‘ance with. the stipulation of October 21, 1960, and our

order of March 27, 1961, and (2) the amounts that would ig

& have been collected. under the: rates filed pursuant to this’

opinion and order, from November 23, 1959, to December

22, 1961, with interest at 6 percent. With respect to Rate .

, ‘

= R * rm ;

> x e :

. ° a “.

9 ge . Oe a ; ~ 5 r - ee

of) 5 2 ° ; : 2 ad ° n° o a °

. _ Ss ra e ‘ ~

TT ey ah Oe Se ee Te a a LO Oe pa

. \

PE OES PE OER PT SE.

e st .

; f

s Pa 27k « f — % Lo »

. > e e -*

. oe CrP 18¢e x

e a . e. a4 ~

re <2 ¢ 2 °

: F a

pet

as * - P 4 « < ee

Pod . : f.« oo. me

es et we fen Sg 4 22,*

~ .

. = A

’ (4, ¥ foe,

ection I-1 ‘and Le the refund shall, in accordance with

_ the stipulation, represent an amount equal to 50 percent

_« of the difference between (1) the stim that would have } been -

payable. under I-1 and'1-2 Rate

February 23, 1961; for 1

Company during the ‘period from June 23, 1959, through

July 22, 1961; aid (2) the charges which would lave been

dules made effective*

pee aA iy Se Ae Ske ie RR EOE ee ao a8 fe APE EE SOLE SS

a | gas | purchased from Gas*.-

e for such service during the same period if I-1 and -

. 12 rates reflecting the Commission’s determination "* (Gietoad

the reserved tax issue had. been in: effect.

(E)’ Gas Company shall accompany its statement of ,

Pe refunds with a computation ‘of the refunds and interest,

and.the derivation thereof, and with a- certificate showing

service of copies thereof on ali purchasers under tlie rate

sehedules involved, interveners, in this proceeding, and -

interested state commissions.. Comments by such parties

shall be submitted to th ommission. within ten days after

a service by Gas Company as Tequired herein.

pa F)- “Within 10 days of the approval of the statements

- "of refunds ‘by the Commission, Gas Company shall. make

’ the requifec

ed refunds-so computed and within 15 days there-

after. shall report to the Commission in writing and under -

oath the amount of refund made to each of its customers,

showing ‘separately the amount of principal and. interest

_ So paid and shall serve a copy of such report upon each

7 of. the customers receiving a refund. Concurrently there-

. with, Gas Company shall-file with respect to such refunds,

releases from its jurisdictional customers showing receipt

’ of the principal and. interest i in conformity ‘with this opin-

~ jon and order. < ; . z

(G) As’ provided i in the Settlement Agreement iesiel ee

_ by our order of March 27, 1961 , Gas‘Company shall file fur-

; _—— redactions and make further refunds as a result

, \

aos a8 - .

eee s

»¢

\ i

of: refunds’ to it by its suppliers ‘Or & reduction in ‘its cost é‘

_ of purchased gas. - , ey “

- (H) The rates required%to be filed herein are seiiiiealns

' subject to such further adjustment as may be required. as a

result of the application of a final decision by the Commis- ~

‘gion in Alabama-Te see ‘Natural Gas Co., ‘Docket No.

| @.5a7t, et al.,* on the reatment of deferred federal i income

taxes to the computation of: the tax allowance made herein. af

. but only from and after the date of such decision or a later

date | if ‘specified’ by the Commission therein.

(I) Exceptions not granted herein are hereby denied.

Commissioner Morgan concurring,

filed a separate statement eS

hereto. —

Commissioner Wéodward dissciting,

,° ._. Joined by Commissioner O’Connor, . -

filed a separate statement paca

Pa hereto.

-_ . /3/ Iz Guile ae

- Joseph H. Gutride, ©

Secretary. «,

- ® [Issued February 2, 1964, 31 FPC 208] ~

, 1% \

ee eee, Se ee

- Ds ‘

; - Docket No: G-18799 NA eer | FSi _- Appendix A

Boe + OFTTES SERVICE GAS COMPANY -

: Normalization of Cities Service Consolidated Tax.

a ae . ee + _* “Calendar Year aa We

ee Petuhin —_ 1958 1959 * Total

ee ee ee Jee Me es “@®@

* ’ : Caleulation of Tax on : be geen oc a,

Consolidated Basis Using pA rep | ene

Straight Line Depreciation : ee eda: ORC ce

4 Consolidated Taxable

4 '. +. , Ineome (Form 1120). $23, 637 1088. ($7,148 71) $ 7,003,440 « $2,404,957 ‘

4 Add: ‘Excess of liberal- Mis

4 ized depreciation and . ; :

accelerated amortiza- _ ) ig eed he

; pa tion over straight line.. .9,147,913 10,245,432. 9,153,089 28,546,434 eae

M5 ARO pcan 82,785,001. 3,099,861. 16,156,529 52,041,391

4 Dednet: Long-term gain (808,823) (2,248,731) (2,486,203) (5,548,257)

: eas Income subject - , ey ae pegs saat

to 54% .....05008 (18,078,798) -- _ — — (18,073,798)

Balance taxable at, 52%.. 18,002,600 ___ 851,130 _ 18,670,326 28,404,336.

> 52% of utility income pers Ps Scot” fas

9s Mormallized oo... 7,229,498 442,588 ° 7,108,570. 14,780,656

54% of non utility ine aes ee |

| - Come nermalized ...... 9,759,851 = — — « °9,759,851 ~.

257% of capital gains... 202,081. 562,183 __—«621,551 «1,385,815.

6 Total cannennnnnme 17,191,480 1,004,771 7,780,121 25,926,422 |

| Lees surtax exemption ... -. Se: ; 5,500 _._- 5,500 ——-16,500

Tax assuming straight Fen Sauk

‘line. depreciation ‘histo $17,185,930 * 990.271 $ 7,724,621 $25,909,822

Appendix :B

Docket No. G.18799 ‘

6 CITIES SERVICE GAS COMPANY

j COMPUTATION OF GAS ree. F.LT.

Income (Normalized) ~ 957 ‘1958 1959 Total

- Qities-Service GagCom- " ys ee are ce

TENSE eecunetitchatiadays gif 290,88 $12,256,412 $18,340,470 $41,877,714

| Cities Service Gas Produe- sea pe ee bee ie Geen ee

ing ell . 2,158;402 2085416 ~ 2/183,609 6,427,497

: Citiés Service Pipe Line . eg gee se eS cee et

Co. 2? 2,622,047 . 2,686,669 _ 3,093,433 _ 8,802,149

' . * Lafitte Oil Traders, ine, a. 22,562 ° 125,455° 275,155 423,172.

Kansas Gas Supply Com- Pali echine te

soo ARR al 215,128 - .839,359* 318,433 867,919

Gities Service Oil Co.—" pea ee ae

Del. (Regulated Portion) 1,499,006 _ 1,259,798 _ — 895,477 _ 3,654,281

- % of Cities Service Gas Co. to Total regulated companies* iaaeeanid &. 67.93%:

Consolidated Tax Allowance for Yéars 1957-1959 (Appendix an 25,909,822 .

Average'Uénsolidated Tax Allowance ($25,909,822 + 8 years) .. 8,636,607 _

ag ae for Cities Service’ Gas _ a 937 x $8,636,607) 5 5, 866,847

* No esthin of ‘the consolidated tax is allowable to Cities Service Production Compas

because that Company trad no taxahle i income. f

MORGAN, Commissioner, concurring:

Oni the basis of the record before us it appears that, by :

_ virtue of filing a consolidate@}Federal income ‘tax return

for the years 1957 through. 1959, the Cities Service System. .

- companies collectively enjoyed a. Federal i income tax saving

* in the order of some, $48 million. * : 3

_Tt also appears from the record before us that with few

exceptions, one of which is discussed below, the parent

a eompany allocated = enormous Sax x aniong the mem-.o

A : 7

st avgipataiaian nia picunidtiabes

OMe lek big Ie ;

~~ *- =

= .

baie of its corporate family on the volbpeitianale basis of

.. Gee taxable insoeie each of them produced.’ This appears *

eminently fair, and this, moreover, is the method the tax .

‘regulations suggest, for. distributing’ these savings among

the. a family. Fah

It is the “few exceptions” that concern us — most par-

ticularly, the Cities Service Gas Company. We: are con-

- eerned with this “exception,” first because that company

sells a commodity vested-with a public interest, at rates

having thé force of law, to consumers whose ratepaying —

welfare we are charged by. Congress with protecting;

second, because on the basis of allocating this saving which

“parent has chosen for its unregulated cqmpanies (that is,

in proportion to taxable’ income),, this particular public

utility should have enjoyed savings of about $17.7 million

during the period mentioned; third, because ‘utility regu-

latign traditionally and. without ‘detectable exception has

always required savings in-utility tax costs to flow through

in the form of reduced rates to the consumers who alone

and by law must bear the utility’s entire tax burden; and

fourth, because the. parent in this. case has refused to

apportion, distribute, allocate or grant a ‘single penny ~

. of the entire tax saving to the public utility that has been

placed under what should be the: watchful eye of the

Federal Power Commission. id -

; The vociferous legalisms and cries of vileiaai that the

company has raised’ as a result of staff’s suggestion that

this utility, like its sister. affiliates, should share fairly,

equitably, and, proportionately i in the tax saving in. ques- -

tion —a tax saving made possible in large part by the .

utility’s taxable i income — have created a _™ and to some

_ degree confusing record here.

But the company’s cries of fart are no more facts .

n felt than the cries and suggestions of “outrage,” “fraud,”

“sf

18 *.

“fictitious,” cdiahiotest “indefensible,” “ginfal” and other .

expletives that were uttered in the [nited States Senate |

atid House of Representatives when, despite the’ same -

_ defenses offered there as here, the details of the selfsame

"practices ‘by the selfsame company were made -known to

the Congress during its consideration of the bill that be--

came the Public Utility Holding Company Act of 1935.1

The practice was not, then and there outlawed because “.

—and it is safe to say only ‘because —.that very practice

had been. “enone for any and all corporations, ‘epoogt

a Specifically, see pages 417-482"of Volume 72A, “Utility Corpo-

ratiqns,” setting forth the results of certain | cial _ Practices ,

uncovered in the course.of the Federal Trade Commission’s mas-

-sive investigation in this utility area from 1928 to 1935; see the

hearings on the bill before the House Commerce Committee at

pages 153-155; Senate hearings at pages 234-255 and 514; the

. debate-on the bill in the Senate at 79 Cong. Ree. 8392 and 8525-

_ . 26; and in the House at 10323. —_

The comment of Senator Norris was typical: |

“Practically all the systems I have shown on.the. various

charts, together with others not shown, made what the law __

formerly permitted — that is, returns for taxation purposes

_ on agonsolidated basis — resulting in a great saving of taxes

. to the holding-company groups, although, as a matter of fact,

operating groups as a rule.were subject to a tax. However,

a the holding com es, taking advantage of the law permit-

ting consoli aun collected the taxes from " Op-

erating companies, and then, by setting off losses ined

by some of the operating companies, it was ewer ty in this .

way to-retain these taxes by balancing losses of some operat-

ing companies against profits of other operating companies.

Thus it has often happened that operating egmpanies have —

paid taxes which ordinarily would have been dué the Federal

Government, and the holding companies by balancing off

losses from other operating companies paid no tax to the

_ Federal Government,-but retained the money tlit operating |

company had paid as taxes. So some ‘operating companies. -

actually paid their taxes, expecting the money to go to the ;

Federal Government through the olding companies, but by

_ . the process I have just described the holding companies kept

. anybody can square, that with — I should like to have

him doit” *

7 ‘ e

. .

: ‘

, : oo. ‘

snmeenwnevmnninete . Se ea a ae ‘

_. the taxes and paid nothing to the Federal Government. If .. ©

19¢

railroads owning 95% of their operating subsidiaries, by ..

the Revenue Act of 1934. But, with the imposition of the

wartinie exeess profits tax, Congress by the Revenue Act

- of 1942 allowed the practice to he resumed. The matter is

. now before us, a Federal: public utility commission, for

- disposition in the light of the basic tenets of the public

utility law we are charged with administering.

_ If this ‘were a matter of tax law, a8 company and the |

dissenting opinion would have .us treat it, we, like the

Internal Revenue Service, -wonld only be ‘interested in

checking the accuracy of company’s arithmetic. . But this

is a rate proceeding, not a tax audit. The problem here _

is only the problem of détermining how the utility’s share.

of the system’s actual tax liability should be determined ;.

_ or the extent to which a regulated, utility’s tax and rate-

paying consumers should realize or be deprived of a saving

in tax cliarges which in utility law are imposed upon and

_ chargeable exclusively to utility ratepayers.?

* 2% Consolidating the income of several wholly-owned- corporations.

for the purpose of determining system income is especially ap-

propriate in ‘the case of public utillity systems, because

‘ment often chooses to organize those systems into a series of .

separate corporations to facilitate doing business in each of the

states in avhich the utility system operates: This is the reason -

* used to justify the.use of the consolidated return by utilities

before Congreks; and this also is the reason Congress removed

the 2% penalty tax for public utilities that: file consolidated‘

returns (see House-Ways and Means and Senate Finance Com-

mittee hearings on H. R. 8400 in the 84th Congress, the bill that —

became the Internal Revenue Code of 1954). And in removing

that penalty*tax,.as well as in making the privilege of filing

consolidated returns available to public utilities as well as to.

other taxpayers, Congress was aware that from the time of the ie

Supreme Court’s opinion in the Galveston case, 258 U.S. 388,

(1922) if not earlier, where the law-of public utility regulation

_» Operates it requires utility consumers to pay the full amount,-

but not more than the full: amount, of the utility’s actual tax

liability, or its allocated share of the system’s actual tax liability.

BREE GEE GON NS NN, OSE TR, Biede Mey Skat et RE RRS 7 Beg

Ps - ‘The difficulty i is not in Gaerinining whether this tility’

"pay its taxes: the difficulty is im-estimating this utility’s

- *» proper share of the saving. Many methods for allocating ©

.. that saving or estimating the utility’s share thereof have

been explored, but each has been found wanting by my

colleagues. Speaking for myself, I must say that the method -

used by Cities Service for allocating its total tax’ liability

and tax saving among some of its subsidiaries, and by the

staff for allocating that total liability and saving among all

_ Of Cities. Services’ subsidiaries, i is the most logical method . _

_ and the one which best meets the: standards and require- \

ments of utility regulation. Further, it alone of all methods .

considered here is the one which reflects those vigorous

expressions of Congressional: intent. in this particular

'- matter which should guide the exercise of our discretion.

_. .. Briefly, the facts in this case relating to the three-year

period under review are these: The system of which Gas

company is a part consists of 37 separate corporations,

about 6 of which are regulated; and the tax’ losses of

- some of.the systeni’s companies reduce the taxable profits

.° of its regulated and unregulated companies and thereby _

reduce the system’s over-all actual tax liability. The amount

of the system’s actual liability—or its tax saving (ie.,

the difference between the total tax that would have been

"paid if each company in the system had been taxed sepa-

me rately; and the tax: actually paid on the profits of those

. companies as reduced by the losses of the other companies)

— properly should be distributed or apportioned over the

. 8ystem’s profit-companies on-the basis of the.separate tax-

ae -. able income each profit company had; and the record ‘be-

fore us is totally barren of any sensible reason for differ-

entiating between regulated and unregulated companies.

At least it is barren of any reason which will stand gana

in the — "= the public _—

ee ~

7 e

. °

prea rentninceteescnsen ce Ba LED AE I EI ERE ARO OLS Sage

° : N

‘ ie.

. ‘

* 2le

Here ne total profits of the’ system’s iia companies

for the three year period were $123.4 million; other .sys- -

. tem companies had tax losses totalling $100 million ; taxable

_ system income thus was $23.4: million; and consolidated

system tax liability for. the three-year period was $11.4

million. The tax saving thus realized was the difference ~ ~

. between the $63.2 million that the profit-making companies

would have paid if they had been taxed separately, and

the $11.4 million that the system actually paid, or (exclud-

ing a $4 million refund in _—, of 1955 taxes) roughly"

.$48 million. .

- Taxable profits of Gas company alone ¥ were > 42 million;

. and it would have paid a tax of about a million éf it

had been taxed separately. |

If the system’s over-all tax liability or-taxa Saving had oa

-. been distributed among the profit companies proportion-

‘ately on the basis of their separate taxable incomes, sitice

Gas company’s $42 million of taxable income was about —

35% of total system‘taxable income ($123.4 million), Gas

company should bear about 35%..(or $4 million) of the.

system’s actual $11.4 million tax liability; and should bene-

fit by.about 35% (or $17 million) of the — S48 million

tax saving.

. But Gas company did not éharge ite consumers $4 mil-

'_ lion for taxes. It charged them the $22 million Gas company ..

"would have had to pay éf it-had been taxed separately.

Gas company turned over thé $17 million saving to the __

parent company; which, the record shows, used these funds

to subsidize its non-regulated activities. s. :

8 We are only’ concerned with Gas dabianess $17 ata share of

the system’s $48 million tax saving, because that 417 million was |

actually paid in cash by Gas company’s consumers who pay its

“taxes.” We are not concerned with the other $31 million. -To

_. the extent it is attributable to the system’s unregulated com-

- panies, it belongs to the stockholders and management who must

see that the taxes of those aeateaes are paid.

Raat:

22¢.,

~ ‘ 4 . = 9 ‘

Gas company says this is all right. It says it really did

- have a “tax” bill of $22 million, because the parent company

on its books did not allocate any of the system’s $48 million .

-tax saving to Gas Company. The parent company purposé-

fully assumed that. its tax losses wiped out the taxable’

income of its unregulated companies (only), and that the 3

whole 37-company system’s tax liability was chargeable to

the regulated companies alone. The result of this “alloca-

tion theéry” — to use a.very dignified term —is that Gas .

‘company’s consumers were charged an‘amount for “taxes”

that was larger than the. actual tax liability of the. entire

37-company system.4 Moreover, Gas company did. not re-

duce its “tax” charge to its consumers even in years when

the ‘amount of system tax loss was so large that, after “oa

wiping out all unregulated company profits, it should have

reduced Gas company’s separately computed “tax” charge. —

The.parent company did not give Gas company’s consumers

the benefit of Gas company’s share of the tax savings as -

computed, even under its own arbitrary | allocation method.

' The position of Cities Service ‘gompany i is that none of the

. System’s tax ‘savings should be used to-reduce Gas com-

pany’s hypothetical “tax” charges to its consumers, because

_ those consumers did not finance the tax losses that gave

rise to those savings. But, as we shall see, that is’ exactly

i what the consumers did, although involuntarily.

, This entire practice i is in complete conflict with the estab-

_ lished principle that because a utility’s consumers alone

_ ‘Inust pay its entire tax bill under rates having the force

of law, a utility cannot charge its consumers more for taxes

than the actual amount, estimated where necessary, that the

| ‘utility actually paid or contributed to the U.S. Rreaery,

| 4 During the three-year ) period i in ‘alates, iil total system

actual tax liability ¥ was oo teu) $11.4 million, Gas omypeny’ 8

consumers were charged $22 $22 million for “taxes.” '

the tax thereon is paid by, utility consumers. so that thefair

_ return will not be reduced by taxes. Once the utility or its _—

'. stockholders have received that return, they may notobtain

more by claiming higher, fictitious, er hypothetical costs

-they. might have. incurred if they’ had. been organized or

operated in somtie other, wnreal manner. To allow additional —

return — over and above a fair return as defined by the.

' courts — is to countenance unjust enrichment of.the utility

or its owners at the expense of the seepeyee. : oe 3

My solleagues, perhaps unwilling to chart aial es

tory. policy amid the consolidated: tax legalisms raised

herein, prefer (a) to separate the system's business into

its regulated and unregulated portions; (b) to apply all of

the system’s tax losses (which normally stem from some of

_ its unregulated activities). to reduce the profits or tax lia,

bility of its unregulated profit companies first, and then (c)

to use whatever loss deductions may remain to reduce the

_, liability that the utility or utilities would have had if they

were separately taxed. This, it will be noted, gives the

’ priority of use of the system’s tax loss benefits primarily

or even entirely to its unregulated profit companies.®

eye

5On the basis of Gas company’s average “tax” charged during:

the three-year test period used herein, Gas company here claimed.

an average annual “tax” allowance of $7,055,981; on the basis

of an allocation of the system's average actual tax during that

period, staff claimed, properly, in my opinion, that-Gas com- °.

-. pany should receive a tax allowance of $789,082; the majority

opinion herein (after normalizing tax deductions for liberalized’

depreciation and accelerated amortization and making other

refinements) grants Gas company $5,866,847. This is not regu-

lation at its best. My reasons Sac — this result are set

| forth hereinafter.

or more than the utiljiy’s proper rund satiate ities of the ae

. system tax actually paid: In the utility field, ‘stockholders

are entitled to a fair, constitutional rate of return, ‘and -

° r

ae ee

In passing, it may be noted that if this policy is equitable

“_ if “turn about is fair play,” the priority could and

perhaps should be reversed for regulatory purposes... That —

is, if preference i is to be given either group of subsidiaries,

_ regulatory authority might properly apply the tax loss

benefits first, towipe out the tax liability: of the regulated.

subsidiaries. (which almost invariably operate at a taxable

_ profit), and then to use whatever loss .deductions.may ~

remain to reduce the tax liability. that the unregulated

subsidiaries would have had if their‘ taxes had been sep-

arately computed. This would not alter the system’s over- |

all tax liability. But it would produce significantly. larger

tax reductions for the regulated companies, which would '

eventually be translated by regulatory authority into re-

“ “+ duced rates and gross revenues. it would likewise.greatly.

reduce the expendable funds, generated . in the guise of -

“taxes” paid by utility ratepayers, which the parent’ com-

pany now disburses across the face of the earth to operate

the speéulative ventures of its various non-regulated cor: '

porations.® It is these: specific corporate operations, in

large part financed. and underwritten by-“taxes” extracted

from ratepayers, which give rise to the tax loss benefits . .

"which the parent company claims it has the exclusive right

. to'enjoy on the ground — the ratepayers had nothing to

do with them!

ae | naturally Sillows that icine of the. priorities herein

approved would produce another barrage of legalisms and

redoubled screams of rage and pain from the parent com-

pany. The reader, whether’ he is a judge; a corporate law-

yer or a utility ratepayer, can reach his own conclusions: as _

' 6 That the great bulk of ‘ins far-flung speculative sialic. are

-* of no benefit or advar ‘age to consumers who are served. by Gas

company — and wh’ y its “taxes” — is made shemeantiot clear

by oe majority op: ion in the second perseraph thereof. .

iti

. discussion this far he can see.clearly what has been happen-

‘ing and he imows exactly to whom it has been happening.,

In any event, it is clear that the policy adopted here gives

priority and. favored treatment to the non-regulated com-

‘panies. rather than. to ‘those whose rates are subject to ~. _.

- regulatory control by this and other commissions. I should . ~

_. have preferred. that no priority or favored treatment be ~

given to either, group; and, speaking only for myself, I

. therefore believe that the actual tax and actual tax alloca-

' \ tion method here urged eck the staff i is the eric — | |

. to this problem. Eye tie 1.

‘ : z a

Most reluctantly, however, and solely for the purpose of

énabling a decision to be reached in this ease, I concur in

f Though far from perfect, it is a discernible iniprovement :

_over the situation that has existed here and in numerous

other corporate families for Imany years. The.approach of *

_ the majority, which is moré in the nature of an assignment

than an allocation, will serve at least to limit the tax liability |

of Gas company’s ratepayers. to tlie actual liability of the

| entire system as a whole. It at least will prevent them fro

having:to pay a tax charge. that-is larger than the. actual toy Yo A

liability of the entire system of which Gas company is a bf

- minor part.’ This is no small matter, for Gas company’s

' lawyers ‘have been unable to. obscure the fact that i in 1958,

when the tax liability of the ‘total system was zero, the

parent company nevertheless’ imposed a “tax” charge upon ~~. oe

the ratepayers of-the regulated utility in the amount of lw”

$6,367,534, not one penny of which was paid tothe Federal r

1 Gas anaiat jurisdictional revenues represent about 5% of

‘the — 8 gross revenues.

\" g —

; roe 2 z ‘ ¢.

> ‘ Pe -

‘Int sum, this method of apportioning the tax saving and

tax burden has the limited virtue of accommodating, to a

very small and unsatisfactory degree, the two irreconcilable

’ eoncepts at war with one another here. That.is, it permits

- company and stockholder to enjoy an overly generous por-

tion of the benefits which they erroneously claim are

entirely theirs by virtue of the tax law alone; and it goes -

- some small way toward producitig a more equitable charge

to ratepayers for the estimated amount of tax liability

actually incurred by or ' attributable to the regulated utility

that. serves them. :

I should have preferred that we face our ssinieiiiiiitilen :

squarely and discharge them fully. Regrettably, that is not

possible; and without my concufrence:the little that has

been accomplished herein will be lost. It is only on that

account that I concur in the result nenehey by my colleagues

of the majority. :

/s/ Howan- Monoam, Commissioner

0 huned . ° Howard Morgan, Commissioner —

WOODWARD, Colimissioner, joined by. -

CONN OR, JB, Commissioner, dissenting:

This is ‘a major rate case in which the Commission must

decide a fundamental and critical question: While the Com-

mission,-in the past, has properly insisted that certain tax

for groups composed entirely, or predominantly, of regu- ~

lated companies, be passed on to consumers, it has not held

that business losses of unregulated and unrelated corpora-

- tions — in & consolidated return should be uti- :

% ‘27

' lized for the benefit of the consumers of a regulated natural

gas company. The latter issue is before us for the first time.

The majority concludes that the proper method to be

applied in computing the Federal income taxes to be in-

cluded in the cost of service of a regulated company where

that company has joined in a consolidated tax return with

affiliates is (1) separate the companies into regulated and

unregulated groups, (2) determine the net aggregate tax-

'. able income of each group, and (3) apportion the net total’ -

consolidated tax liability over a representative period of

. time between the two groups, and among the companies in

.. the regulated group on the basis of their respective taxable

-incomes:. If each of the resulting groups shows a net tax-

cable income, this formula would fairly, allocate the total

tax in accordance with the respective amounts of taxable

income. But where, as here, thé unregulated group has a

net loss for the test period, the formula appropriates that

loss which was the result of expenses and losses finance by’

the stockholders and deducts it from the tax allowance to - -

be charged the ratepayers, thereby granting to them the

entire benefit emanating from the tax loss. As applied.

here, the $2.4 million net taxable loss of the unregulated

group is handed over to the ratepayers by deducting it\«—

from the taxable incomé of Gas Company, thereby reducing

its tax allowatice by $1.2 million. a

: oY

The Opinion and Order adopted by the majority is based

". on the false premise that, as to industries regulated by it,

the Commission has the authority to limit the effect of a:

mandate of Congress as expressed in Section 1501 of the

Internal Revenue Code. Depriving Gas Company of a tax

allowarice which would be routinely granted to it by. the

Commission if it were not for its having a common owner

with an unregulated ahd unrelated petroleum’ business,

should not be done without’ some very persuasive reasons

Fak - ; | 7 a 28

. @ : .

based: upon sound rate-making policies which impose no

confiseatory rates, which balance equitably consumer and

investor interests and which take fully into consideration

~. the impact of such action upon national econemic policies.

At: the root of regulation is economic policy: The problem

of econdmic growth in the United States is crucially i impor-

. tant and inseparably related to economic growth is invest-

ment. Under the majority view, the consolidated return

would not result in stimulating investment and. growth

begause it has*the effect of converting hon-jurisdictional

‘losses within the»parent company’ . system into a rate.

reduction for gas consumers. The majority opinion is-not ...

~ “supported by persuasive reasons based on sound policy:

Since this Commissién” possesses only the legislative

.. powers which the Congress has granted to us, clearly we

_ have'no power to-amend Section 1501 of the Code. . Apart

_ from the fact that there ‘are no tax savings attributable

to the inclusion of Gas'Company in the ‘consolidated return,

‘the majority view is unlawful. because it has the effect 5?.

regulating non-utility enterprises beyond the Commission’s -

_ jurisdiction; it would strip the parent company of con-

ae gressionally-conferred rights to tax deductions of its, non-

jurisdictional subsidiaries. ~The —" is in error and '

I dissent. . oe: .

The Cities Service. per is operated oxindipaily ‘asan

integrated petroleum operation. The jurisdictional reve-

nues of Cities Service Gas Company, a ‘wholly owned.

-, sub ry.of Cities Service Company, comprised approxi-. .

mately 4.88%, 5.14% and 6.16% of the .total system reve-

nues in 1957, 1958, and 1959. respectively. ,Only 3% of the

gross revenues of two other companies in the system are |

subject to Commission jurisdiction." .

1 Cities Service Prodiietion Company-and Cities Service 94 Com- 3

pany (Seawer).

sminslodgnibe So sists . sib ibeanaabinysait

Te MA gi ee ete

DEAS cont be BIS AM

—y

of 52%.

a o>

“In this pitinsding, the Cisnintasinin § is ‘ etnbites the,

proper Federal income .tax allowance, to be. included in:

_- the cost of service of Gas Company, one-of. 37 subsidjaries ..

. joining the — Sompeny in Be filing of a consolidated

return.”

‘Chapter 6 of the Stacia Revenne Code, “Consolidated

Returns,” Section 1501, “Privilege to File” Consolidated

' Returns” gives to “an‘affiliated group of corporations the

privilege of making ‘a consolidated return with respect to

‘the income tax imposed” on corporations of. which ‘the

parent company owns 80% or more of the ontstanding :

stock. When corporations join in such returns, the Code,

Section 1503, levies an additional 2% -tax upon all includ- oe

able taxable income except that of utilities such as Gas “ote

Company whose tax =m remains at the ere rate |

-- >

The precise intent of: Congress i in granting the privilege —

of the consolidated return to an affiliated group of .cor-,:

porations was to encourage companies to expand their »

overall businesses for the betterment of the national and

international-economy and to eliminate any tax disadvan-

tages of doing such through subsidiaries. ~- . ec

The parent company here owns, ‘directly or indizectly,

Ms 100% of ‘the stock ef every a which —. |

- 2 Consolidated simetne inertial on the ulnitinlts of having a tax

-on the true income of a single enterprise even though the: waa

ness is operated through more than one corporation: _

The primary advantages of filing a consolidated. return may

~ be summarized we in pow

e offsetting o operating losses of one company against

the profits of another.

_. (2) The consummation ‘of. inter-company transactions without

the recognition of income. .

(3) The designation of the parent —— AS | agent of the —

croup. for = tax purposes. | ;

% <<

an ° “e ’ . ate lil

5 ; SR HE eee

< . os “ine -

: - . .

b ? . ee

in the filing of its sieuebinian retarn. As such stock- -

"holder its own 100% of the assets of each corporation, —

and it is entitled to 100% ‘of all net income of each, sub-_

_ ject: to income taxslevies. Also, as .the sole stockholder, -

it bears 100% of every risk, expense and loss sustained

“by its subsidiaries. These expenses and losses should, not

be Appropriated for the consumers of a regulated natural

gas company who bore no part of them, assumed no risks

in relation to them, and ‘have no right to use them to re-

_— their gas costs. * :

* The parent’s . conducting of its peireleen buaiziess

through many subsidiaries is a matter of lawful choice

and the permission given by the Internal Revenue Code

for the filing of one consolidated return ‘by qualified ‘af-

filiated subsidiaries recognizes stich lawfulness. Gas. Com-

bois pany performs’ no “activity or function in relation to the

parent company’s primary business of conducting its pe-_.

troleuni operations. Gas Company is a regulated natural

‘gas company transporting and selling natural gas for re-

salé in interstate commerce and it is operated as such.

: entirely separately. from the petroleum operations of the

parent company. Whether oneof the included corporations

has a taxable gain or loss is determined from its individual

‘ taw return calculated separately. It is in the separate return

pohere all lawful expenses’ of operation are deducted to;

determine whether there a income of the individual cor- a

poration subject to tax. (emphasis supplied)*

+ The examiner clearly determined, on the basis of 1 rec-

ord, that no part ofthe cost of producing the/ revenues

of the petroleum busihess contributes in any way to pro-

duce Gas Company’s revenues. No part of Gas Com-

pany’s costs, including its income tax’ allowance, contrib-

= [Le., by Commissioner Woodward.}:

Bho wt Soto ty

<hr

are)

read be beat yf Bait 14

31¢

utes in any way to producing revenues to the petroleum

entity. No part of any loss of any subsidiary corporation.

_ in the petroleum business, operated as an’entity, is re--

flected in Gas Company’s agreed cost.of service.:The net

‘taxable income of Gas Company gave rise to no tax sav- |

_ ings by the parent; the parent, in effect, see p. 174 [32-3e]

infra, paid the full 52% statutory rate on the taxable i income

| of the Gas. Company.

I see no justification for crediting the Gas Ocmpiny with

part of the losses, thereby reducing its allowance for income

taxes. To ‘do so would result.in a windfall to the Gas Com-

pany’s customers and would deprive: the parent of tax de-

ductions to which it is lawfully entitled. Stated simply, the

tax savings were the result of non-jurisdictional operations

and were not financed by Gas Company nor in any way made

‘. possible by the inclusion of. the Gas Company in the con-

. solidated tax return group. Most assuredly, Gas Company

is not entitled to tax savings arising out of foreign and

- domestic exploration, production, ‘refineries, gas station

operations, petrochemical, tanker and other non-jurisdic- ~

tional operations. The majority view would inflict harmful

consequences oh the unregulated subsidiaries ewhich the -

Commission is without power to cure. Unlike the case when —

it regulates the Gas Company alone, the Commission lacks

authority. either. to increase or decrease the prices which

_ the non-utility subsidiaries charge for their petroleum prod-

.*. ucts. Briefly, the majority proposal is a regulatory one

. > way street.

*¥

_ As Examiner Kelly has eile declared, “The Code

does not contain the criteria for rate ‘making. in this ca

Under fhe Code, one only considers whether the corpora-

tigns involved are qualified to participate in the consoli-

dated return, whether-such qualified corporations have law-

_ fully computed their respective tax labilities, what’the con-

a « bad S &

“ 3

: Zw

~~ one ee

826

solidated tax should be, and ‘whether all other tax laws or

regulations have been met’... The Commission determines

the proper return to be allowed upon the rate base and the

proper income tax allowance to make the return net to the

investor, and no tax law or regulations should interfere

with the performance of this function by the Commission

—— in om consolidated tax return, and to ascertain from what

situations or circumstances they may: have resulted. There

considerations are demanded by the public ‘interest. The. .

publie interest demands that a petroleum business receive,

at the hands of the Commission, at least as much encour-

agement and incentive in the conduct of its exploration and —

development activities as the national policy particularly

as expressed in the income ‘tax laws, dictates.”

" ‘The uncontroverted evidence of record conclusively es-

tablishes that for each of the test years selected, ‘the

inclusion of Gas Company added a cost to the consolidated

"return in an amount equal to 52% of Gas Company’s tax-

able income. In 1957, the parent company paid a consoli-

dated tax of $12 ,251,639 on the income of its subsidiaries of

which $5,860,398 was attributable to and equal to 52% of .

-Gas-Company’s taxable income. In 1958 the parent com-

- pany received a tax refund of $6,367,534, but it would have .

received a total refund of $10,224,666 if Gas Company had

not participated in the consolidated return. Thus, the

parent company, in effect, paid a tax of $6,367,534, repre- ;

senting 52% of Gas Company’ s 1958 taxable income, by

‘ .foregoing the additional refund in that amount. In 1959, .

the parent company paid a tax of $2,965,014, but it would -

have received a refund in the amount of $6,566,531, if Gas

ee Company had not been included in the consolidated return.

Thus, the parent, in effect, paid $9,531, 545 in payment of

the tax at the rate of 52%-on Gas Company’s taxable income.

The record: shows that Gas Company’s taxable income. was

not necessary td produce tax savings in the test years.

oro

sey are

: There i is no. ahi that: Gas Company would pay a 52% |

_. tax had it been considered on a separate basis. The parent, ~° eee -

ae by including Gas: Company in the consolidated return, ————

gdded a cost thereto equal to 52% and allocated a 52% cost

to the Gas Company. I fail to see where the inequity of

such an allocation lies. ‘The parent company obtains no tax

‘or other advantage from including Gas Company in its

consolidated ‘return. Owning 100% of: the stock of Gas

Company, the law requires that it includes this subsidiary

in its.consolidated return. Gas Company, being a regulated 7

monopoly with a practically assured net income each year,

is not among the subsidiaries with losses to offset against .

the total net taxable income of all subsidiaries having such -

losses. Therefore, no tax saving wh&tever results to the” |

parent company from the inclusion of _ Company i in the

consolidated return.

The examiner noted further, “Any imnediate but per-

haps temporary tax saving accomplished by the filing of a |

_ consolidated return is not in any sense comparable to a

real and permanent tax saving effected by taking a lawful |

deduction and passing on ‘the benefit thereof to-consumers. *

“The tax saving effected by proper deductions is a definitely

known and fixed saving for the tax year, which is certainly

not true of any. temporary saving effected through the

. offsetting of. business losses against business gains. It is"

not the mere filing of the consolidated return but the fact

of business losses having been sustained in ‘the particular

witich permit the temporary tax savings. The .

distinetior mus at be acknowledged between the fixed and

g i eS 2 gh ont, a ee) eee 2 & ee

PERERA ihe tet AN et aay Mey be IS SATE A Fae 0h a RAE IRE I EE

certained } accomplished by- utilizing ieiineie

losses in a cans¢lidated return. The latter should not be

used to lowe 4s allowance in a cost of service.”

j .

' ce AO AEE LIE FLT TIN cent on

Fe ee: eam Ore neteetene s

‘ pnts

: is ee

Completely ignoring the fact that Cingriens has seisribad

' .-that-tax payers may lawfully ‘use their tax losses to offset

their taxable income in the manner provided by statute, the

majority imparts its own preemptory economic and regula-

| tory philosophy to strike down an act of Congress.

The majority cites no authority of the Conimission o or the

-. Courts to sustain this onerous theory. This proceeding

cannot be resolved on the basis of an imagined rationale

which is in fact'contradicted by the record or by the recit- -

' ing of an appealing slogan. This is a clear deprivation of

property without due process of law since the majority

proposes: to take away from the non-utility subsidiaries

and the parent company valuable property rights which

‘ belong to those companies. The tax deductions given by

Congress-as incentives to-non-utility investment should not |

be taken away in such manner. No company owes anyone

a duty either moral or legal to incur, or to continue to incur,

losses in non-jurisdictional business so that jurisdictional

Fates can be reduced.- Following the theory of the majority,

how can an integrated oil company, which also has a nat-

ural gas pipeline company within its corporate structure,

compete on equal terms with an oil company not having

similar“pipeline operations, if the latter can use all of its

tax savings in its oil business but the former cannot?

Clearly, it cannot | so compete.

I ‘would Teflect on a point that deserves serious consid-

eration. All but three of the 37 corporations involved in

this proceeding are, in some way, connected with the petro-

‘ leum business operated by the parent company. Conceiv-

ably,.the parent’s business could be conducted: by a depart-

mentalized single corporate entity. If this be true, there

would be no losses to offset against taxable income since .

. the single’ corporation would show an overall profit al-

though some of its departments would lose money.’ Under

ee : ,

er Oe eA PEMA TEY Neer oe SaaS = Stas

ehh ihaier OREN

Aa Sheets EUS are

. 856° > ea ;

‘such. circumstances: no. consolidated return would be filed

~“gid“the~Commission would routinely grant to the Gas

: Company a tax allowance based on the statutory rate of

52%. In the instant proceeding, thé-majority places a pen-

alty on the parent company because it has lawfully chosen

to operate its world wide business through subsidiaries.

7 Such a regulatory policy is unsound and inequitable. -

The fact remains that Congress has given the parent —

company, not this Commission, the right to decide whether

or not it will take advantage’of the consolidated return and

the benefits and obligations accruing thereunder. The Com-

mission cannot interfere with this lawful decision of man- |

agement so to conduct its business. The tax laws recognize

this and they have given companies the opportunity to so

operate without sustaining a tax loss becatise of their bus- .

iness activities. Congress did not commit management

judgments to an administrative agency; this is the line past —

. which a regulatory commission such as ours may not go.

_ If the economic advantage arising out of the filing of a

. consolidated tax return is to be passed on to Gas Company’s ~

_ yers, which is the effect of the majority decision, the

of Congress will be defeated. Here, the language of

re statute is plain and unambiguous and it must be given

effect according to its obvious meaning. By allowing the

taxpayer. the full advantage provided by the consolidated —

return, no attendant harm results to the ratepayers. This

method does not. result in higher rates to the consumer,

it simply does not operate to reduce them. This, view is in

harmony with Section 1501 of the Internal Revenue Code,

is fair to the ratepayer yet it does not constitute an eine

priation of the constitutional powers of Congress.

The majority decision results in glaring defects. and

_ inequities; they have not offered any valid and compelling

36c

reasons for their decision. Oiatirery 1 to the views expressed

by the majority, I believe every effort should be made to

afford all legitimate and necessary incentives to private

enterprise while, at the same time, —_—— the consumer

ratepayer. |

” The ian who heard the testimony in this Se caiailiae

correctly concluded, upon the basis of the record evidence

and the pertinent law and.regulatory policy, that the Fed- °

eral income tax allowance included in the cost of service

supporting the settlement agreement approved by the Com-

mission in its, order of May 27, 1961, computed at the .

statutory rate of 52%, is not excessive or in any “way im-

proper, and should be approved. In my judgment, the —

examiner’s decision should be —

fj, Hania Wetwvise

/s/ LJ. O'Connor, Jn.

o: : _ Harold C. Woodward, Commissioner -

L.-J. O’Connor, Jr., Commissioner .

4 of .

x if 1d- :

| APPENDIX Bit

TAXABLE NET INCOME OF. UNION

aimee eatycssicas COMPANY rie

adele aide Bo bjpdeettons

sl Net - and Non- (100% Non- ;

Year ‘ Income Jurisdictional) Jur ) oa

A). "@) i: me |

Senne ‘ $(2,269,975) $(1,486,211) $- (783,764) «

a Seana 4,852,736 3,430,415 1,422,301 _

nn sre” (1,958,898) - (461,366) . (1,497,632)

1960 pssserreeenee (4,833,704) (1,486,232) (2,897,472) -

A) ne (160,285), 460,648 . (620,933) -

ie Total .... Ia coc $ 507,254 $(4,376,880)

Col, (1) —Ex. 36 (Revised) (hrm) id en

Col. (2) — Ex. 14-1, Sch. 2; line 12, ol. 4 (RB I'6)

a Col. (3).— Difference. between Col. (1) and Col. (2) |

‘Note — Gas operations of Union do not reflect income of $180,131

‘for amounts received for prepaid gas (Ex. ” 1, Sch. 7, p. -

1, L. 10, Col. 10) alarien

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