Opinion ID: 2158160
Heading Depth: 1
Heading Rank: 3

Heading: Allocation of Interest for Income Tax Purposes

Text: As we have shown, the company is an operating company and also a holding company. As permitted by the Federal income tax law it makes a consolidated return. Its long term debt is in the form of first mortgage and collateral trust bonds issued under a mortgage bond indenture. Under the indenture its subsidiaries may borrow only from it and all of their stock must be owned by it. All of the stock of its subsidiaries and all of their debt are deposited as collateral under the indenture with the indenture trustee. In arriving at the cost of service for the years 1948, 1949, 1950 and 1951 the commission has included items to cover the Federal income tax and the Vermont franchise tax, and states that in computing taxes on income the company is allowed to deduct such items as interest, amortization of bond discount and expense, and miscellaneous income deductions before arriving at taxable income. In its 1948 Federal income tax return the company deducted $222,058.25 of such items in arriving at its computation of the amount due the Federal government. The commission reports that the company contends that in computing Vermont's portion of Federal income taxes it is impossible to allocate any portion of this sum to Vermont and, therefore, Vermont's share of Federal income tax should be computed with no income deductions. The State's claim that the company made the same contention relative to subsequent years appears to be supported by the findings, and there appears to have been no contention to the contrary until the company filed its exceptions to the allocation made by the commission. However, when the company filed its Vermont franchise tax returns for 1948 and 1949 it took somewhat larger credits than the commission has allocated to it on its Federal returns, but the commission finds no evidence that the company underpaid its tax obligations. The commission finds that an equitable portion of the credits for interest, amortization of debt discount and expense must be allocated to Vermont in computing the company's Federal income tax for Vermont, and that such an allocation can be best provided by applying the ratio of Vermont's net plant to company's total net plant (utility plant less reserves for depreciation, depletion and amortization) based on the average of beginning and year end balances and computes the percentages based on the company's actual figures of net plant in its 1948 and 1949 annual reports to the commission, showing total net plant and Vermont net plant. For 1950 and 1951 the commission uses the 1949 year end percentage. As it turns out the figures for company's total net plant only include that part it owns as a separate corporation, and does not include the utility plant owned by its two wholly owned subsidiaries. The company says in its brief that the company directly owns 70% of the consolidated net plant and its subsidiaries own 30%. The company now agrees to the principle applicable to the allocation of the expense of interest as stated by the commission and previously quoted, but argues, under an appropriate exception, that the commission failed to allocate the interest on long-term debt and amortization of debt discount and expense on the basis upon which it stated such allocation should be made, claiming that the phrase total net plant, as used by the commission, means total consolidated net plant, of the company and its subsidiaries. The company claims that the nature of the indenture securing the bonds makes the plant account of the subsidiaries just as much security for the bonds as the corporate plant account of the company, which is directly mortgaged. It states that the only reason that it has wholly-owned subsidiaries for ownership in California and Alaska rather than directly owning such property, is that the applicable laws of California and Alaska require or make advantageous the use of domestic corporations in those jurisdictions. Without deciding that under every possible event that might occur the mortgage indenture makes the plant account of the subsidiaries just as much security for the bonds as the corporate plant account of the company, we think that it does so substantially. In its findings the commission has used the total capitalization of $11,493,719 as shown in finding 2, to compute the effect of the returns it has allowed, thereby accepting that figure as representing the total prudent investment or net plant of the company and its subsidiaries. It has thus treated the entire enterprise as unitary in character. Under the terms of the mortgage indenture the commission should also have treated the long term debt as unitary in character. An exhibit prepared by Mr. Goubleman shows the total capitalization as of December 31, 1949, to have been $10,579,160. The figure of total net plant as of that date used by the commission was $7,291,244.45. We are satisfied that the commission inadvertently and erroneously used figures representing total net corporate plant rather than the larger figures for net consolidated plant in computing percentages. Although we are inclined to charge the error of the commission to the unreasonable stand taken by the officials of the company before the commission, and to think that had they cooperated in presenting the matter to the commission as it has been presented to us, the error would not have been made, we are satisfied that in fairness and justice the error should be corrected. The result will be that smaller sums for interest, amortization of debt discount and expense will be deducted in computing the company's Federal income taxes upon its Vermont plant for the years in question. This will increase somewhat the allowances for such taxes, and consequently the total cost of service, and may require a slight adjustment in the rate schedules ordered by the commission. The company's exception 39 to the findings is sustained. The order of the Public Service Commission is reversed, and the cause is remanded for the limited purpose of recomputing the allowances for Federal income taxes and for cost of service for the years 1948, 1949, 1950 and 1951, and for the purpose of making any necessary adjustments in the rate schedules, all in accordance with the views herein expressed. In all other respects the findings and conclusions of the commission are approved. In computing allowances for Federal income taxes the Commission shall use no percentages of interest on long-term debt, amortization of debt discount and expense, and other interest charges, lower than those claimed by the petitioner in its exception 39 to the Commission's findings. To be certified to the Public Service Commission.