Source: https://openjurist.org/232/f2d/805/omaha-public-power-district-v-w-omalley
Timestamp: 2019-04-18 18:42:24+00:00

Document:
Reece A. Gardner, Kansas City, Mo. (Raymond M. Crossman, Thomas C. Quinlan, Omaha, Neb., G. Lee Burns, Kansas City, Mo., Brown, Crossman, West, Barton & Quinlan, Omaha, Neb., and Stinson, Mag, Thomson, McEvers & Fizzell, Kansas City, Mo., on the brief), for appellants.
Karl Schmeidler, Attorney, Department of Justice, Washington, D.C. (H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack and Robert N. Anderson, Attorneys, Washington, D.C., and Donald R. Ross, U.S. Atty., Omaha, Neb., on the brief), for appellee.
This is an appeal from the judgment of the District Court dismissing plaintiffs' (appellants) complaint for recovery of federal income tax imposed upon income of the Western Iowa Power Company, hereinafter called Western Iowa. We will refer to the parties as plaintiffs and defendant. The principal plaintiff is the Omaha Public Power District, a public corporation and political subdivision of the State of Nebraska, hereinafter called Omaha District, which corporation is the owner of the rights of all of the plaintiffs to any recovery in this action. The question which arises upon this appeal is whether the income earned, reported, and paid by Western Iowa for the period from December 2, 1946, to May 14, 1949, was exempt from federal income tax under section 116(d) of the Internal Revenue Code of 1939, 26 U.S.C.A. 116(d), as income derived from a public utility and accruing to a political subdivision of a State.
The trial court adopted the facts stipulated by the parties as its findings of fact. There is no factual dispute. Omaha District is a political subdivision of the State of Nebraska. The income of Western Iowa was derived from a public utility. The stipulation sets out the long and complicated history of the creation of Omaha District and its acquisition of property. This history is set out in detail in Omaha Public Power District v. O'Malley, D.C., 114 F.Supp. 3, affirmed 8 Cir., 216 F.2d 764. For our purposes here it is sufficient to state that, pending enabling legislation and the legal test thereof, some public-spirited Omaha citizens, interested in placing the Omaha utilities under local public ownership, organized Omaha Electric Committee, Inc., a nonprofit Nebraska corporation. Omaha Electric Committee acquired all of the stock of the Nebraska Power Company which furnishes the electric service to the Omaha territory, and also to an adjoining section of Iowa. The purpose of Omaha Electric Committee was to act as a medium by which the electric system of Nebraska Power Company could be acquired and transferred to a political subdivision of the State of Nebraska. Omaha Electric Committee was bound by an agreement to transfer without profit the properties it acquired to Omaha District, and at all times recognized this obligation. Omaha District was organized in 1945, and a decree upholding its legality was entered in 1946.
The only way the Omaha utilities could be advantageously acquired was by the purchase of all of the stock of Nebraska Power Company. Since Nebraska Power Company owned some Iowa electric utilities these necessarily were included in the transaction. Because of the decision of the Nebraska Supreme Court in State ex rel. Johnson v. Consumers Public Power District, 143 Neb. 753, 10 N.W.2d 784, 152 A.L.R. 480, and the doubt that existed whether Omaha District court lawfully operate the Iowa utilities, Omaha Electric Committee and Omaha District agreed that Western Iowa, an Iowa corporation for pecuniary profit, would be organized to acquire and operate the utilities located in Iowa. Such agreement also contemplated that the Iowa assets would be sold as soon as practicable and that all proceeds of sale would be paid to or used for the benefit of Omaha District. Western Iowa operated the Iowa utilities from December 2, 1946, until May 14, 1949, and during said period reported its income for federal income tax purposes and paid the income taxes due. On May 14, 1949, Omaha Electric Committee completed the sale of all stock and bonds of Western Iowa to Iowa Power and Light Co. As part of said transaction Iowa Power and Light Co. agreed that any income tax refund that might be due in this action would be the property of Omaha District. Omaha Electric Committee recognized and carried out its obligation to transfer to Omaha District the Nebraska utilities, and also paid to or for the benefit of Omaha District the proceeds received from the sale of the Iowa properties. No dividends were paid by Western Iowa during the period involved in this action.
The trial court had jurisdiction. 28 U.S.C. § 1340. Claims for refund were filed and disallowed. All conditions precedent to the institution of this action as required by 26 U.S.C. § 3772, 1952 Edition, have been met. This court has jurisdiction. 28 U.S.C. § 1291.
The trial court correctly states that the sole issue involved in this case is the question of whether the income from Western Iowa accrued to Omaha District. Plaintiffs contend that the word 'accruing' in section 116(d) means 'inuring,' and that such interpretation is supported by legislative history, treasury interpretations, and by City of Galveston v. United States, 10 F.Supp. 810, 81 Ct.Cl. 371; and Jamestown & Newport Ferry Co. v. Commissioner, 1 Cir., 41 F.2d 920. The trial court rejected plaintiffs' contention, relying principally upon Bear Gulch Water Co. v. Commissioner, 9 Cir., 116 F.2d 975.
'* * * The contention here is that the act exempts the entire income, including that going to the stockholders.
The right, if any, on the part of the city to a refund under section 116(d)(1) was not reached for adjudication.
'This statute is applicable only if 'a part of such proceeds for the taxable year would accrue directly to or for the use of' the City. Section 116(d)(1). Since, as has been determined, no earnings of the company (except dividends) accrued directly to or for the use of the City, it follows that this statute does not apply.
Plaintiffs assert that in the Bear Gulch and the Burlington cases, hereinabove discussed, the legislative history of section 116(d) was not adequately considered. At the invitation of the court, both parties have filed supplemental briefs discussing the consideration given the legislative history of section 116(d) in the Bear Gulch and Burlington cases.
'1. Law. To come into existence as an enforceable claim; to vest as a right; as, a cause of action has accrued when the right to sue has become vested.
Plaintiffs urge that Congress had in mind definition No. 2 set out above. We do not agree. It seems more reasonable to us that in framing statutes Congress had in mind definition No. 1 above, the legal definition of the word 'accrue.' The cases hereinabove cited strongly support such a conclusion.
Moreover, section 116(d) grants an exemption, and as a general rule statutes granting exemptions are to be strictly construed. United States v. Stewart, 311 U.S. 60, 71, 61 S.Ct. 102, 85 L.Ed. 40; Omaha Public Power District v. O'Malley, supra.
No dividend was paid by Western Iowa during the period involved in this litigation, nor was any such dividend declared. Consequently, Omaha District acquired no vested right or enforceable claim with reference to any of the income earned by Western Iowa during the period here involved. No part of the income of Western Iowa accrued to Omaha District.
We are convinced that the income of Western Iowa was not exempt from federal income taxation. It cannot possibly be demonstrated that Western Iowa was a political subdivision of any State. The corporation was an entirely separate and distinct entity from its stockholder.

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