Docket No. 3727. | B.T.A. | Nov 27, 1926
Lead Opinion
The sole question for decision is whether the petitioner may include as a part of the loss sustained by the destruction of a dam the interest paid on the borrowed funds used in its construction,
The petitioner argues that the item of $38,224.51, representing interest during construction of the dam, is a part of the cost of the dam, and, as the basis for deduction of a loss under section 234(a) (4) of the Revenue Act of 1918 is cost, this item is an allowable deduction. The propriety of including so-called carrying charges (taxes and interest) in capital investment in computing gain or loss is concidered and decided in Westerfield v. Rafferty, 4 Fed. (2d) 590; 5 Am. Fed. Tax Rep. 5342. The taxpayer in that case claimed the right to deduct interest and taxes paid from the sales price of property. The substance of the decision is that these items do not form a part of the cost for the purpose of determining gain or loss, the court saying, in part:
This leads us to consider what these taxes were and what this interest was.
To be sure, they are often called “ carrying charges,” and it goes without question that, in fixing a selling price, most business men include these charges and many other expenditures. * * * Yet taxes and interest, when properly defined, do not really represent anything paid into the capital investment * * *.
The principle announced in that case has been followed by this Board in Appeal of Columbia Theatre Co., 3 B. T. A. 622, 628.
The petitioner says that the Westerfield and Columbia Theatre cases are not in point, as in neither of them was the taxpayer required by law to capitalize interest as was the taxpayer in the present case. The laws of California (Act of Dec. 23, 1911, c. 14, sec. 48, Stats. 1911, Ex. Sess., p. 18; Act of Apr. 23, 1915, c. 91, sec. 48, Stats. 1915, p. 115) empower the Railroad Commission of the State “* * * to establish a system of accounts to be kept by the public utilities subject to its jurisdiction, or to classify said public utilities and to establish a system of accounts for each class, and to prescribe the manner in which such accounts shall be kept. It may also in its discretion prescribe the forms of accounts, records and memoranda to be kept by such public utilities * *
Water corporations, under the California statutes, are included in the classification of public utilities. Pursuant to the authority conferred by the above statute, the Railroad Commission promulgated a “ Uniform Classification of Accounts for Water Corporations,” which became effective January 1, 1913. In this classification it is provided as a subheading under the general head of “ Tangible Capital ” as follows:
0-20. Interest During Construction:
Charge to this account the interest accrued upon all moneys (and credits available upon demand) acquired for use in connection with the construction and equipment of the property from the time of such acquisition until the construction is ready for use.
It is also contended that good accounting practice requires the inclusion of interest in determining the cost of property. This contention overlooks that portion of the decision in Westerfiéld v. Rafferty, supra, holding that interest does not represent anything paid into the capital investment.
Judgment will he entered for the Commissioner.