Opinion ID: 1865373
Heading Depth: 1
Heading Rank: 2

Heading: Income Tax Effect

Text: General Telephone is a wholly-owned subsidiary of General Telephone & Electronics (GTE), a nationwide conglomerate of utility and other diversified corporations. General Telephone has filed a consolidated federal income tax return with GTE. In computing the amount of federal income tax expense to be considered in determining General Telephone's net operating revenue for the test year, the Commission was unable to ascertain from the company's books a particular dollar amount for these taxes  there is no such figure because income taxes are paid by the parent and allocated by accounting entries among GTE's various subsidiaries. In the absence of a specific dollar figure available from the books of General Telephone, the Commission applied its traditional subsidiary approach and computed an allowance for federal income tax expense equal to the hypothetical tax which would have been paid if General Telephone had filed a separate federal income tax return. The effect of this computation, according to public counsel, is to treat the capital structure of General Telephone as consisting entirely of equity held by GTE, ignoring the fact that GTE's capital structure is an admixture of debt and equity. Public counsel contends that this is misleading, resulting in overcharges to General Telephone's ratepayers, because the actual dollars paid in federal income tax on behalf of General Telephone are computed from a debt-equity mix in the capital structure of GTE. [14] He asserts that a failure to recognize the parent's debt-equity mix in the computation of tax effect produces double leverage, permitting General Telephone to receive an allowance for income tax expense greater than the actual income tax liability for which it is properly responsible under GTE's consolidated return. The dollar difference between actual tax payments on General Telephone's behalf by GTE and the hypothetical tax for which the ratepayers will be charged is alleged to be $4,755,560. Both the Commission and General Telephone defend the subsidiary method of calculating tax effect on the ground that the choice of proper accounting treatment is discretionary with the Commission. They maintain that public counsel may not rely on the Commission's recent order directing Southern Bell Telephone and Telegraph to compute tax effect based on a consolidated approach, since in that case Southern Bell also consolidated its capital structure for rate base computations. [15] They further assert that the Commission's action here is consistent with Southern Bell because in this case the Commission has approved a subsidiary approach for the rate base computation, as it did for the tax effect, and the former was approved without public counsel's objection. Respondents do not, however, suggest why a subsidiary approach should not be used for one purpose and a consolidated approach for the other, and the only reasoning offered to support parallel treatment is a declaration of the need for consistency which appears in specially concurring opinions authored by the prevailing commissioners. [16] After weighing the arguments presented and attempting to discern a rationale for a rule of consistency, we are unable to conclude with the majority of the Commissioners that the use of the subsidiary approach for determining cost of capital automatically dictates the use of the same approach for tax effect calculations. Each determination must be based on specific independent findings supported by competent substantial evidence. See Section 120.59(1), Florida Statutes (1975); International Minerals and Chemical Corp. v. Mayo, 336 So.2d 548, 552-53 (Fla. 1976). There was no such independent finding in this case, and what evidence there is in the record [17] supports the consolidated approach as being more accurate. [18] Accordingly, we are compelled to reverse the Commission on this issue. Section 120.68(10), Florida Statutes (1975). For the reasons expressed, we remand this case to the Commission to adjust General Telephone's rate award by application of the consolidated approach to the computation of federal income tax expense, and to reconsider the use of a year-end rate base for General Telephone in light of the principles enunciated. [19] It is so ordered. ADKINS, Acting C.J., BOYD, HATCHETT and KARL, JJ., concur.