LINDHEIMER ET AL. v. ILLINOIS BELL TELEPHONE CO.
No. 440
Supreme Court of the United States
Argued January 15, 16, 1934. Decided April 30, 1934.
* Together with No. 548, Illinois Bell Telephone Co. v. Lindheimer et al.
292 U.S. 151
By leave of Court, Mr. Patrick H. O‘Brien, Attorney General of Michigan, and Mr. Harold Goodman filed a brief on behalf of the State of Michigan, as amicus curiae.
MR. CHIEF JUSTICE HUGHES delivered the opinion of the Court.
This case comes here for the second time. It presents the question of the validity under the
No. 440.—The appeal of the state officers and the City of Chicago. On the former appeal, it appeared that no distinction had been made by the Commission or by the District Court between the intrastate and the interstate property and business of the Company. We found that separation was essential to the appropriate recognition of the competent governmental authority in each field of regulation. Accordingly, we directed that as to the value of the property employed in the intrastate business in Chicago and as to the amounts of revenue and expenses incident to that business, separately considered, there should be specific findings. And as a rate order which is confiscatory when made may cease to be confiscatory, and one which is valid when made may become confiscatory at a later period, we held that there should be appropriate findings for each of the years since the date of the Commission‘s order. 282 U.S. pp. 149, 162. On the further hearing, that difficult task was so well performed that no question is now raised as to the allocation of property to the intrastate and interstate services, respectively, in the Chicago area, the allocation being made on the basis of use.2 Nor is there dispute with respect to the
Considering the fact that ninety-nine per cent. of the stock of appellee is owned by the American Telephone & Telegraph Company, which also owns substantially the same proportion of the stock of the Western Electric Company, we directed that there should be further examination of the purchases made by appellee from the Western Electric Company and of the payments made by appellee to the American Company. As it appeared that the Western Electric Company, through the organization and control of the American Company, was virtually the manufacturing department for the Bell system, we directed specific findings to be made as to the net earnings of the Western Electric Company in that department and as to the extent to which, if at all, such profit figured in the estimates upon which the charge of confiscation was predicated. We also held that there should be specific findings with regard to the cost to the American Company of the services which it rendered to appellee and the reasonable amount which should be allocated in that respect to the operating expenses of appellee‘s intrastate business. Id., pp. 153, 157. The District Court entered into an exhaustive examination of these questions and made detailed findings. The court found that the equipment and supplies furnished by the Western Electric Company had been sold to appellee at fair and reasonable prices, and that the earnings of the Western Electric Company on its investment allocated to the business done
The District Court made specific findings as to the character of the services rendered by the American Company under its license contracts with appellee and the amounts of the cost of these services which should be allocated to the operating expenses of the latter‘s intrastate business. In the years 1923 to 1928, inclusive, when the court found that the payments under the license contracts charged on appellee‘s books exceeded the cost as thus determined and allocated, only the cost was held to be chargeable to operating expenses, but in the years 1929 to 1931, inclusive, when the license payments as so charged were less than the cost, only the amount of the license payments was allowed as an operating expense.5 Appellants raise many questions in opposition to these determinations of costs and allocations, while appellee contends that the costs as found were less than the true costs and that the full amounts paid under the license contracts should have been allowed.
The court‘s findings, for each year, of the fair value of appellee‘s property, used and useful in its intrastate business in the Chicago area, including working cash capital, materials and supplies, construction work in progress and going value, taking the average amount for the year, and
| Fair Value | Book Cost | |
|---|---|---|
| 1923 | $124, 200, 000 | $95, 074, 135 |
| 1924 | 136, 500, 000 | 105, 291, 980 |
| 1925 | 148, 500, 000 | 117, 730, 536 |
| 1926 | 151, 500, 000 | 130, 857, 355 |
| 1927 | 167, 000, 000 | 146, 173, 197 |
| 1928 | 173, 000, 000 | 159, 622, 212 |
| 1929 | 184, 000, 000 | 168, 988, 816 |
| 1930 | 187, 120, 000 | 178, 157, 620 |
| 1931 | 179, 100, 000 | 181, 925, 963 |
| 1932 | 166, 500, 000 | 181, 925, 963 |
Appellants contend that the findings as to fair value are excessive. Appellee insists that they are too low. In particular, appellee says that the property was undervalued through excessive deductions for existing depreciation. Appellee maintains that the evidence shows a maximum depreciation of 9 per cent. for the years 1923 to 1928, and of 8 per cent. thereafter, instead of the 16 per cent. and 15 per cent. deducted by the court.
In computing the net revenue from the intrastate business in Chicago, the court made adjustments in operating expenses with respect to the payments to the Western Electric Company and the American Company, as above stated, and also reduced to some extent the annual charges for depreciation. By these adjustments, the amount of the net revenue as found by the court largely exceeded that shown by appellee‘s books. For example, the amount available for return in the year 1923 under the existing rates appears to have been $5,347,533 according to appellee‘s books, while the amount found by the court to have been available for return in that year is $6,646,183. We shall presently refer to the comparison for the other years.
The court found that, if the rates in suit had been effective, appellee‘s net earnings on its intrastate business
The court found that the fair rate of return on the average fair value of the intrastate property was 7½ per cent. for each of the years 1923 to 1927, inclusive, 7 per cent. for each of the years 1928, 1929 and 1930, 6½ per cent. for 1931, and 5½ per cent. for 1932. On the basis of these findings of fact, the court concluded that the rates in suit were confiscatory at all times from the date of the Commission‘s order.
The experience of the Company under the existing rates. The effect of the decision below, and of the findings upon which it is based, strikingly appears if we put aside for the moment the rates in suit and consider that effect in relation to the existing rates under which the Illinois Company has conducted its business since 1920. That is, if we compare the amounts available for return—the net intrastate income in Chicago under existing rates—as shown (1) by appellee‘s statement from its books and (2) by the court‘s adjustments, with (3) the amount of the net income which, under the findings of fair value, income, expenses, and rate of return, would be necessary to avoid confiscation. The following table—with columns correspondingly designated—gives the comparison:7
| (1) | (2) | (3) | |
|---|---|---|---|
| 1923 | $5, 347, 533 | $6, 646, 183 | $9, 315, 000 |
| 1924 | 6, 230, 178 | 7, 483, 954 | 10, 237, 500 |
| 1925 | 6, 650, 718 | 7, 880, 451 | 11, 137, 500 |
| 1926 | 6, 887, 012 | 8, 052, 698 | 11, 362, 500 |
| 1927 | 6, 877, 089 | 8, 363, 580 | 12, 525, 000 |
| 1928 | 7, 601, 567 | 8, 627, 760 | 12, 110, 000 |
| 1929 | 9, 490, 091 | 10, 679, 602 | 12, 880, 000 |
| 1930 | 9, 152, 490 | 10, 138, 263 | 13, 098, 400 |
| 1931 | 8, 494, 616 | 9, 826, 299 | 11, 641, 500 |
| 1932 | 8, 000, 000 | 9, 157, 500 |
On this showing, the findings if accepted would compel the conclusion that when the Commission‘s order was made in 1923, not only the new rates, but the existing rates as well were grossly confiscatory; that appellee was receiving under the existing rates, according to its books, a net return of $5,347,533 when it was entitled to nearly $4,000,000 more, or $9,315,000, to prevent its property from being confiscated. The table shows a similar situation in the succeeding years. Again, the inference would be irresistible that the existing rates were confiscatory when they were prescribed by the Public Utilities Commission of Illinois (the predecessor of the present Commission) in December, 1920, to be effective January 1, 1921. In the comprehensive disclosure of appellee‘s financial condition there is nothing to permit an inference of any radical change which would have made rates, compensatory in 1921, confiscatory in 1923.
But, instead of challenging the existing rates as constituting an invasion of constitutional right, appellee when summoned by the Commission, in September, 1921, in the proceeding which led to the order now under review, asserted that the existing rates were just and reasonable. In its answer to the Commission, appellee alleged “that its rates and charges heretofore approved and authorized by the aforesaid order of the Public Utilities Commission
The financial history of the Illinois Company repels the suggestion that during all these years it was suffering from confiscatory rates. Its capital stock rose from $9,000,000 in 1901, to $70,000,000 in 1923, $80,000,000 in 1925, $110,000,000 in 1927, $130,000,000 in 1929, and $150,000,000 in 1930. Its funded debt, which was somewhat less than $50,000,000 in 1923, continued at about the same amount until 1930. During this period appellee paid the interest on its debt and 8 per cent. dividends on its stock. Its “fixed capital reserves,”8 which embraced the depreciation reserve presently to be mentioned, rose from $37,575,004 in 1923, to $63,966,748 in 1930, and to $69,242,667 in 1931. The Company‘s surplus and undivided profits over and above these capital reserves increased from $5,600,326 in 1923, to $22,907,654 in 1930, and to $23,767,381 in 1931. Its “fixed capital,” that is, the book cost of “total plant and general equipment,” which was $145,984,084 at the end of 1923, increased to $288,381,090 at the end of 1930, and to $291,259,580 at the end of 1931.9 We do not lose sight of the fact that this showing embraces the entire business of the Illinois Company, both interstate and intrastate. But it appears that the intrastate investment in the Chicago area ap-
This actual experience of the Company is more convincing than tabulations of estimates. In the face of that experience, we are unable to conclude that the Company has been operating under confiscatory intrastate rates. Yet, as we have said, the conclusion that the existing rates have been confiscatory—and grossly confiscatory—would be inescapable if the findings below were accepted. In that event, the Company would not only be entitled to resist reduction through the rates in suit, but to demand, as a constitutional right, a large increase over the rates which have enabled it to operate with out-
The effect of the reduction through the rates in suit. The foregoing considerations limit our inquiry. It is not necessary to traverse the wide field of controversy to which we are invited and to review the host of contested points presented by counsel. In the view that the existing rates cannot be regarded as inadequate, the question is simply as to the effect of the reduction in net income by the rates in suit. The question is whether the Company has established, with the clarity and definiteness befitting the cause, that this reduction would bring about confiscation. Los Angeles Gas Co. v. Railroad Comm‘n, 289 U.S. 287, 304, 305. The amounts of the reduction for the respective years are not in dispute.11 It would have been $1,541,668 for 1923, would have been greatest, at $1,740,000, for 1929, and least, at $1,270,000, for 1932.
Operating expenses. In determining the effect of these reductions, and what amounts would still be available to the Company for net return, we come to the questions raised by the Company‘s charges to operating expenses. Charges to operating expenses may be as important as valuations of property. Thus, excessive charges of $1,500,000 to operating expenses would be the equivalent of 6 per cent. on $25,000,000 in a rate base. In this in-
Annual allowances for depreciation. The Commission, in the order under review, concluded that the depreciation reserve (amounting, at the end of 1922, for the Chi-
| Court‘s Allowances | Book Charges | |
|---|---|---|
| 1923 | $4, 000, 000 | $4, 222, 000 |
| 1924 | 4, 250, 000 | 4, 470, 000 |
| 1925 | 4, 750, 000 | 5, 048, 000 |
| 1926 | 5, 400, 000 | 5, 767, 000 |
| 1927 | 6, 000, 000 | 6, 335, 000 |
| 1928 | 6, 650, 000 | 7, 009, 000 |
| 1929 | 7, 000, 000 | 7, 436, 000 |
| 1930 | 7, 200, 000 | 7, 865, 000 |
| 1931 | 7, 400, 000 | 8, 133, 000 |
Broadly speaking, depreciation is the loss, not restored by current maintenance, which is due to all the factors causing the ultimate retirement of the property. These factors embrace wear and tear, decay, inadequacy, and obsolescence.19 Annual depreciation is the loss which takes place in a year. In determining reasonable rates for supplying public service, it is proper to include in the operating expenses, that is, in the cost of producing the service, an allowance for consumption of capital in order to maintain the integrity of the investment in the service rendered.20 The amount necessary to be provided annually for this purpose is the subject of estimate and computation. In this instance, the Company has used the “straight line” method of computation, a method ap-
While property remains in the plant, the estimated depreciation rate is applied to the book cost and the resulting amounts are charged currently as expenses of operation. The same amounts are credited to the account for depreciation reserve, the “Reserve for Accrued Depreciation.” When property is retired, its cost is taken out of the capital accounts, and its cost, less salvage, is taken out of the depreciation reserve account. According to the practice of the Company, the depreciation reserve is not held as a separate fund but is invested in plant and equipment. As the allowances for depreciation, credited to the depreciation reserve account, are charged to operating expenses, the depreciation reserve invested in the property thus represents, at a given time, the amount of the investment which has been made out of the proceeds of telephone rates for the ostensible purpose of replacing capital consumed. If the predictions of service life were entirely accurate and retirements were made when and as these predictions were
Confiscation being the issue, the Company has the burden of making a convincing showing that the amounts it has charged to operating expenses for depreciation have not been excessive. That burden is not sustained by proof that its general accounting system has been correct. The calculations are mathematical but the predictions underlying them are essentially matters of opinion.22 They proceed from studies of the “behavior of large groups” of items. These studies are beset with a host of perplexing problems. Their determination involves the examination of many variable elements, and oppor-
In this instance, the evidence of expert computations of the amounts required for annual allowances does not stand alone. In striking contrast is the proof of the actual condition of the plant as maintained—proof which the Company strongly emphasizes as complete and indisputable in its sharp criticism of the amount of accrued depreciation found by the District Court in valuing the property. The Company insists that “the existing depreciation in the property, physical and functional, does not exceed 9 per cent. in the years 1923 to 1928 and 8 per cent. thereafter.” The existing depreciation as thus asserted by the Company, and the amounts it shows as the depreciation reserve allocated to the intrastate business in Chicago (taking in each case the average amounts per year) are as follows:
| Years. | Existing depreciation. | Depreciation reserve.23 |
|---|---|---|
| 1923 | $11, 992, 000 | $26, 797, 000 |
| 1924 | 12, 865, 000 | 29, 316, 000 |
| 1925 | 13, 775, 000 | 32, 155, 000 |
| 1926 | 14, 621, 000 | 35, 572, 000 |
| 1927 | 15, 360, 000 | 39, 352, 000 |
| 1928 | 16, 241, 000 | 42, 769, 000 |
| 1929 | 15, 300, 000 | 44, 515, 000 |
| 1930 | 15, 863, 000 | 45, 829, 000 |
| 1931 | 15, 828, 000 | 48, 362, 000 |
In explanation of this large difference, the Company urges that the depreciation reserve in a given year does
Giving full weight to these considerations, we are not persuaded that they are adequate to explain the great disparity which the evidence reveals. As the Company‘s counsel say: “The reserve balance and the actual depreciation at any time can be compared only after examining the property to ascertain its condition; the depreciation, physical and functional, thus found can be measured in dollars and the amount compared with the reserve.” Here, we are dealing not simply with a particular year but with a period of many years—a fairly long range of experience—and with careful and detailed examinations made both at the beginning and near the end of that period. The showing of the condition of the property, and
This condition, kept at a nearly constant level, directs attention to the amounts expended for current maintenance. In the process of current maintenance, “new parts” are “installed to replace old parts” in units of property not retired. Such “substitutions or ‘repairs‘” are separate from the amounts which figure in the depreciation reserve. The distinction between expenses for current maintenance and depreciation is theoretically clear. Depreciation is defined as the expense occasioned by the using up of physical property employed as fixed capital; current maintenance, as the expense occasioned in keeping the physical property in the condition required for continued use during its service life. But it is evident that the distinction is a difficult one to observe in practice with scientific precision, and that outlays for maintenance charged to current expenses may involve many substitutions of new for old parts which tend to keep down the
| Current maintenance. | Depreciation. | Total. | |
|---|---|---|---|
| 1923 | $5,643,623 | $4,222,000 | $9,865,623 |
| 1924 | 6,043,737 | 4,470,000 | 10,513,737 |
| 1925 | 6,563,193 | 5,048,000 | 11,611,193 |
| 1926 | 7,714,364 | 5,767,000 | 13,481,364 |
| 1927 | 8,849,550 | 6,335,000 | 15,184,550 |
| 1928 | 9,941,143 | 7,009,000 | 16,950,143 |
| 1929 | 10,671,576 | 7,436,000 | 18,107,576 |
| 1930 | 11,372,858 | 7,865,000 | 19,237,858 |
| 1931 | 10,842,053 | 8,133,000 | 18,975,053 |
These aggregate amounts range from over 30 per cent. to nearly 40 per cent. of the total amounts charged by the Company to operating expenses.25
In the light of the evidence as to the expenditures for current maintenance and the proved condition of the property—in the face of the disparity between the actual extent of depreciation, as ascertained according to the comprehensive standards used by the Company‘s witnesses, and the amount of the depreciation reserve—it cannot be said that the Company has established that the reserve merely represents the consumption of capital in the service rendered. Rather it appears that the depreciation reserve to a large extent represents provision for capital additions, over and above the amount required to cover capital consumption. This excess in the balance of the reserve account has been built up by excessive
In answer to appellants’ criticism, the Company suggests that an adjustment might be made by giving credit in favor of the telephone users “in an amount equal to 3½ per cent. upon the difference between the depreciation reserve and the amount deducted from the valuation for existing depreciation.” The suggestion is beside the point. The point is as to the necessity for the annual charges for depreciation, as made or claimed by the Company, in order to avoid confiscation through the rates in suit. On that point the Company has the burden of proof. We find that this burden has not been sustained. Nor is the result changed by figuring the allowances at the somewhat reduced amounts fixed by the court below.26
We find this point to be a critical one. The questionable amounts annually charged to operating expenses for depreciation are large enough to destroy any basis for holding that it has been convincingly shown that the reduction in income through the rates in suit would produce confiscation.
The case has long been pending and should be brought to an end. The Company has had abundant opportunity to establish its contentions. In seeking to do so, the Company has submitted elaborate estimates and computations, but these have overshot the mark. Proving too much, they fail of the intended effect. It is not the function of the court to attempt to construct out of this voluminous record independent calculations to invalidate the challenged rates. It is enough that the rates have been established by competent authority and that their invalidity has not been satisfactorily proved.
The decree below is reversed and the cause is remanded with direction to dissolve the interlocutory injunction, to
No. 548.—The appeal of the Company. The Company was successful in the District Court and has no right of appeal from the decree in its favor. The Company is not entitled to prosecute such an appeal for the purpose of procuring a review of the findings of the court below with respect to the value of the Company‘s property or the other findings of which it complains. Its contentions in these respects have been considered in connection with the appeal of the state authorities and the city. The appeal of the Company is dismissed. New York Telephone Co. v. Maltbie, 291 U.S. 645.
Decree in No. 440 reversed.
Appeal in No. 548 dismissed.
MR. JUSTICE BUTLER, concurring.
The evidence does not show that the amounts taken by the company from revenue and charged to the depreciation reserve were required for the maintenance of the property or that the amounts allowed by the lower court for that purpose were needed. The ruling in condemnation of the charges to the depreciation reserve is so important that, even at the risk of duplication, emphasis should be laid upon some facts and reasons that may be cited in its support.
The court‘s opinion discloses the principle followed for the ascertainment of the amounts annually so charged. It is the straight line method calculated on cost less salvage.1 That method was prescribed by the Interstate
The table next below shows by years in column (1) the intrastate reserve balances, in (2) the intrastate book cost of the property and in (3) percentages that the balances are of the cost.
TABLE I.
| (1) | (2) | (3) | |
|---|---|---|---|
| 1923 | $26,797,000 | $95,074,135 | 28.1% |
| 1924 | 29,316,000 | 105,291,980 | 27.8 |
| 1925 | 32,155,000 | 117,730,536 | 27.3 |
| 1926 | 35,572,000 | 130,857,355 | 27.1 |
| 1927 | 39,352,000 | 146,173,197 | 26.9 |
| 1928 | 42,769,000 | 159,622,212 | 26.7 |
| 1929 | 44,515,000 | 168,988,816 | 26.2 |
| 1930 | 45,829,000 | 178,157,620 | 25.9 |
| 1931 | 48,362,000 | 181,925,963 | 26. |
The cost of the property includes from $2,000,000 to $3,000,000 paid for land which is not depreciable, and $13,000,000 to $18,000,000 paid for buildings having a long service life. There are other important and relatively permanent plant elements. These facts suggest that the percentages shown in the table are considerably lower than the actual relation of reserve balances to cost of depreciable parts of the property. While much of the plant is new, the reserve was piled up at about the rate that the cost of plant increased. The balances held in respect of all property, interstate and intrastate, increased from about $4,000,000 in 1911 to about $26,000,-
The table below shows by years in column (1) the amounts actually expended for current maintenance, in column (2) the amounts charged to depreciation reserve, in column (3) the total of both.
TABLE II.
| (1) | (2) | (3) | |
|---|---|---|---|
| 1923 | $5,643,623 | $4,222,000 | $9,865,623 |
| 1924 | 6,043,737 | 4,470,000 | 10,513,737 |
| 1925 | 6,563,193 | 5,048,000 | 11,611,193 |
| 1926 | 7,714,364 | 5,767,000 | 13,481,364 |
| 1927 | 8,849,550 | 6,335,000 | 15,184,550 |
| 1928 | 9,941,143 | 7,009,000 | 16,950,143 |
| 1929 | 10,671,526 | 7,436,000 | 18,107,526 |
| 1930 | 11,372,858 | 7,865,000 | 19,237,858 |
| 1931 | 10,842,053 | 8,133,000 | 18,975,053 |
The importance of the amounts involved is illustrated by the following table which shows by years (1) expenditures for current maintenance plus charges to depreciation reserve, in (2) revenues, in (3) the percentages that the former are of the latter.
TABLE III.
| (1) | (2) | (3) | |
|---|---|---|---|
| 1923 | $9,865,623 | $37,146,181 | 26.5% |
| 1924 | 10,513,737 | 39,353,954 | 26.5 |
| 1925 | 11,611,193 | 42,560,451 | 27.2 |
| 1926 | 13,481,364 | 45,932,698 | 29.3 |
| 1927 | 15,184,550 | 49,163,580 | 30.8 |
| 1928 | 16,950,143 | 53,677,760 | 31.5 |
| 1929 | 18,107,526 | 58,279,602 | 31 |
| 1930 | 19,237,858 | 58,698,263 | 32.7 |
| 1931 | 18,975,053 | 56,496,299 | 33.5 |
TABLE IV.
| (1) | (2) | (3) | |
|---|---|---|---|
| 1923 | $9,865,623 | $31,550,286 | 31.2% |
| 1924 | 10,513,737 | 33,275,574 | 31.5 |
| 1925 | 11,611,193 | 35,649,160 | 32.5 |
| 1926 | 13,481,364 | 38,893,042 | 34.6 |
| 1927 | 15,184,550 | 42,142,649 | 36 |
| 1928 | 16,950,143 | 45,704,899 | 37 |
| 1929 | 18,107,526 | 48,489,647 | 39.4 |
| 1930 | 19,237,858 | 49,319,993 | 39 |
| 1931 | 18,975,053 | 47,904,196 | 39.5 |
The actual annual expenditures to keep the plant in proper condition for service are made up of the amounts included in current maintenance and those taken from the depreciation reserve. The table next below is illustrative and is intended to show by years in column (1) that total, in column (2) the revenue, in (3) the percentage that the former is of the latter.
TABLE V.
| (1) | (2) | (3) | |
|---|---|---|---|
| 1924 | $7,994,737 | $39,653,954 | 20.1% |
| 1925 | 8,772,193 | 42,560,451 | 20.6 |
| 1926 | 10,064,364 | 45,163,580 | 21.8 |
| 1927 | 11,404,550 | 49,163,580 | 23.1 |
| 1928 | 13,533,143 | 53,677,760 | 25.2 |
| 1929 | 16,361,526 | 58,279,602 | 28 |
| 1930 | 17,923,858 | 58,698,263 | 30.5 |
| 1931 | 16,442,053 | 56,496,299 | 29.1 |
The purpose of this table is to compare the percentage in each year with the percentage in each of the other years. It is to be observed that the lowest is 20.1% (1924) and the highest 30.5% (1930). This comparison
From the foregoing it justly may be inferred that charges made according to the principle followed by the company create reserves much in excess of what is needed for maintenance. The balances carried by the company include large amounts that never can be used for the purposes for which the reserve was created. In the long run the amounts thus unnecessarily taken from revenue will reach about one-half the total cost of all depreciable parts of the plant. The only legitimate purpose of the reserve is to equalize expenditures for maintenance so as to take from the revenue earned in each year its fair share of the burden. To the extent that the annual charges include amounts that will not be required for that purpose, the account misrepresents the cost of the service.
The company‘s properties constitute a complex and highly developed instrumentality containing many classes of items that require renewal from time to time. But, taken as a whole, the plant must be deemed to be permanent. It never was intended to be new in all its parts. It would be impossible to make it so. Expenditures in an attempt to accomplish that would be wasteful. Amounts sufficient to create a reserve balance that is the same percentage of total cost of depreciable items as their age is of their total service life cannot be accepted as legitimate
SPRING CITY FOUNDRY CO. v. COMMISSIONER OF INTERNAL REVENUE.
Nos. 727 and 728. Argued April 3, 1934.—Decided April 30, 1934.
Notes
“Depreciation of Plant and Equipment.—Telephone companies should include in operating expenses depreciation charges for the purpose of creating proper and adequate reserves to cover the expenses of depreciation currently accruing in the tangible fixed capital. By expense of depreciation is meant—
(a) The losses suffered through the current lessening in value of tangible property from wear and tear (not covered by current repairs).
(b) Obsolescence or inadequacy resulting from age, physical change, or supersession by reason of new inventions and discoveries, changes in popular demand, or public requirements, and
(c) Losses suffered through destruction of property by extraordinary casualties.
The amount charged as expense of depreciation should be based upon rules determined by the accounting company. Such rules may be derived from a consideration of the company‘s history and experience. Companies should be prepared to furnish the Commission, upon demand, the rules and a sworn statement of the facts, expert opinions, and estimates upon which they are based.
The estimate for depreciation of physical property should take into account—
(a) The gradual deterioration and ultimate retirement of units of property which may be satisfactorily individualized, such as buildings, machines, valuable instruments, etc., to the end that by the time such units of property go out of service there shall have been accumulated a reserve equal to the original money cost of such property plus expenses incident to retirement less the value of any salvage.
(b) The depreciation accruing in property which cannot be readily individualized, such as pole lines, wires, cables, or other continuous structures, where expenditures for repairs or replacements of individual parts ordinarily are not actually made until the