Opinion ID: 1297749
Heading Depth: 1
Heading Rank: 16

Heading: Investment Tax Credit.

Text: [37a] As a result of federal legislation granting to business corporations the so-called investment credit, the federal income taxes for which Pacific became actually liable were reduced effective January 1, 1962, by a sum equal to 3 per cent of the amount invested in certain newly acquired depreciable equipment forming a part of Pacific's plant. (Revenue Act of 1962, 26 U.S.C. §§ 38, 46-48.) For the test period this credit totaled $4,581,000. Petitioner maintained that in arriving at test-period net revenues it should be permitted to deduct federal income taxes in the total amount it would have incurred without the investment credit, and that the credit should be deducted from the cost of the new plant to which it applies (i.e., from the rate base), with a corresponding deduction of test-period depreciation expense from that otherwise allowed. The commission in its decision found that Pacific's method of deducting the investment tax credit from rate base ... should be rejected for intrastate rate-fixing purposes; that the flow-through to income method of applying the credit to reduction of allowable test-period tax expense is reasonable, is consistent with the treatment accorded the ... credit by this Commission in the fixing of rates of other utilities in this State, and should be followed here. Accordingly, the commission deducted the credit from test-year federal income tax expense claimed by petitioner and offset it by $340,000 for depreciation on the resulting higher rate base; the net deduction was thus $4,241,000. The flow-through method employed by the commission immediately bestows upon ratepayers the full benefits of the tax credit accorded Pacific. Pacific's proposed method of deducting the credit from rate base, with corresponding annual deductions from depreciation expense and from revenues required to earn the allowed return upon rate base, would not deny such benefits to ratepayers but would defer them by spreading them over a period of years. Pacific claimed that its method, which it termed service life flow-through, would actually flow through more dollars over the life of the property. Pacific asserts that the federal Congress enacted the investment credit for the express purpose of providing to business corporations financial assistance and stimulus to modernize and expand productive facilities, by reducing the net costs of the new equipment, thereby increasing the earnings of such equipment over its productive life; [15] that this purpose was further demonstrated when, by another federal enactment effective January 1, 1964, federal regulatory agencies were specifically prohibited from using the investment credit to reduce the cost of service for rate fixing, except by consent of the utility involved and except for proportionate yearly charges against the plant facilities to which the credit applied (Revenue Act of 1964, § 203(e), 26 U.S.C. § 38 note); that the California commission in its treatment of this tax credit is unlawfully frustrating and defying congressional intent, and has not regularly pursued its authority. [38] Section 203(e) of the 1964 act, to which Pacific refers, is entitled Treatment of Investment Credit by Federal Regulatory Agencies and by its language declares among other things that It was the intent of the Congress in providing an investment credit under section 38 of the Internal Revenue Code of 1954 [as amended by the 1962 act] ..., to provide an incentive for modernization and growth of private industry (including that portion thereof which is regulated). Accordingly, Congress does not intend that any agency or instrumentality of the United States having jurisdiction with respect to a taxpayer shall, without the consent of the taxpayer, use [the investment credit [16] ] to reduce such taxpayer's Federal income taxes for the purpose of establishing the cost of service of the taxpayer or to accomplish a similar result by any other method. (Italics added.) The commission does not dispute the general purpose of the investment credit as reiterated by the Congress in the 1964 act, but argues that the language italicized above demonstrates lack of congressional intent to restrict state regulatory action. This approach appears reasonable, and a contrary view is not required by United States v. Georgia Public Service Com. (1963) 371 U.S. 285, 292-293 [83 S.Ct. 397, 9 L.Ed.2d 317], or Public Utilities Com. of California v. United States (1958) 355 U.S. 534, 540-544 [78 S.Ct. 446, 2 L.Ed.2d 470], cited by Pacific, which dealt with the state regulatory action which hindered the federal government from negotiating for the least expensive transportation of government property and personnel. Nor is Application of Montana-Dakota Utilities Co. (N.D. 1960) 102 N.W.2d 329, 339-340, persuasive; that case dealt with amortization of an emergency facility rather than with the investment tax credit. Further, the court there commented that adding tax savings to income as proposed by the state commission results in a greater detriment to the taxpayer than a deduction from the rate base. Although Pacific here argues for the deduction from rate base, it is not altogether clear that in the long run that method would result in a lesser detriment to Pacific; as already noted Pacific claims that its method would actually flow through more dollars to income over the life of the property. [37b] In sum, the treatment accorded by the commission to the investment tax credit appears well within the ambit of the legislative process which applies to general rate fixing, is not shown to be arbitrary or unreasonable, and should not be overturned by this court. (See American Toll Bridge Co. v. Railroad Com., supra, 12 Cal.2d 184, 205 [12].)