Public utilities. Public utilities

Transcription

1 404.1 Accounting methods; income and cost accounting; accruals. Guides are provided for an accrual method public utility with respect to the reporting of income from, and cost of, gas distributed to customers after the last meter reading and billing cycle of its taxable year and the extent payments received under a monthly budget billing procedure may be deferred from income in one year for inclusion in the following taxable year. Rev. Rul clarified , (Secs. 446, 451; 86 Rev. Rul , C.B Accounting methods; meter reading and billing cycle. A change by an accrual basis regulated public utility company from a bimonthly meter reading and billing cycle to a bimonthly meter reading and interim monthly billing cycle is a change of accounting method requiring the prior consent of the Commissioner. Consent to such a change will ordinarily be given provided the utility agrees to adjustments which will avoid the distortion of income in the year of change , (Sec. 446, 481; 86 Rev. Rul , C.B Accounting methods; monthly to bimonthly billing cycle. A change by an accrual basis regulated public utility from a monthly to a bi-monthly reading and billing cycle is a change in accounting method requiring prior consent of the Commissioner. The change will be permitted if the utility company agrees to adjustments which will avoid the distortion of income or expenses in the year of change. Clarified by Rev. Rul , (Secs. 446, 481; 86 Rev. Rul , C.B Antitrust settlement. Where an amount received in settlement of an antitrust action brought under section 4 of the Clayton Act is less than the actual damages claimed and at the time of the settlement a portion of the cost of the asset involved in the suit had been fully amortized, the total amount, received must be applied to reduce the amount of the remaining adjusted basis of the asset. If the amount exceeds the remaining basis, such excess is includable as ordinary income for the taxable year of receipt or accrual. Where there has been depreciation through multiple asset or composite accounting, the taxpayer may only adjust the basis of the asset which was the subject of the suit , (Secs. 61, 1016; 86 Rev. Rul , C.B Connection fee including construction charge. A connection fee, which includes a construction charge for the installation of a service line and water meter, that a new subdivision lot Public utilities owner must pay to a public utility to obtain water service is includible in a public utility s gross income for transactions after January Clarified with respect to non retroactivity. Rev. Ruls revoked and modified , , (Secs. 61, 118, 7805; 86 Rev. Rul , C.B. 33; Rev. Rul , C.B Consumer refunds; claim of right. Application of section 1341 to amounts refunded by a public utility to consumers under legally binding agreements, where price increases in gas purchased by the company were passed on to consumers and also added to the cost of goods sold (Sec. 1341, 86 Rev. Rul , C.B Contributions to capital. Guidance is provided regarding certain payments or transfers of property to regulated public utilities by qualifying small power producers and qualifying cogenerators under section 118 of the Code. Notice , C.B Conversion of customers heating equipment. Amounts expended by a public utility company to convertor adapt its customers steam heating equipment to the use of gas are capital expenditures recoverable through depreciation. In computing the depreciation deduction under section 167 the methods described in subsections (b)(2), (3), and (4) may not be used , 1.167(a)-3, 1.263(a)-2. (Secs. 162, 167, 263; 86 Rev. Rul , C.B Deferred expenses; state requirement. An accrual method public utility should continue to deduct the cost of fuel actually consumed and used to generate electricity distributed during its taxable year even though the state public service commission requires it to account for certain expense increases in a later year. The difference between its book income and taxable income must be reconciled on Schedule M of Form , , (Secs. 162, 446, 461; 86 Rev. Rul , C.B Demand charges; inventories. Demand charges and all other necessary charges incurred by retail gas utilities in obtaining gas for resale from storage companies or from transmission companies are a part of the cost of gas purchased and, therefore, are includible in inventory cost (Sec. 471, 86 Rev. Rul , C.B Depreciation; abnormal retirement. The loss in 1967 on an abnormal retirement of a boiler and generating unit owned by a public utility could not, under the circumstances, include an amount computed with respect to a normal retirement in 1954 of property that was directly associated with such equipment (a)-8. (Sec. 167, 86 Rev. Rul , C.B Depreciation; abnormal retirement. In determining the adjusted basis of abnormally retired assets put into service prior to 1971 by a public utility, which elected to use the class life system of computing depreciation for the years 1971 through 1974, depreciation to be taken into account for the period after 1970 is determined by assuming that the class life is the average expected useful life of the assets in the composite account, and depreciation prior to 1971 is based on the individual lives of the assets. Rev. Rul clarified (a)-12. (Sec. 167, 86 Rev. Rul , C.B Depreciation; average rate assumption method. An alternative is provided to the average rate assumption method that satisfies the

2 normalization requirements of section 203(e) of the Tax Reform Act of 1986 when a taxpayer s books and records (for ratemaking purposes) do not reflect adequate vintage asset account data (classification of property by year placed in service). (Sec. 168, 86 Rev. Proc , C.B Depreciation; average rate continuing multiple asset account. A regulated public utility retiring a boiler and generating unit, accounted for in a primary account with a depreciation rate based on average estimated useful lives of such unit and similar property, is held using an average rate continuing multiple asset account (a) 7. (Sec. 167, 86 Rev. Rul , C.B Depreciation; CLADR system; excluded additions. Expenditures made by a regulated public utility in installing light watchmen on customers premises and in extending its distribution system to service additional residential customers are excluded additions that must be capitalized and are not deductible expenditures as a part of the repair allowance under the CLADR system (a)-11, 1.263(f)-1. (Secs. 167, 263; 86 Rev. Rul , C.B Depreciation; CLADR system; normalization of tax deferral. An electric utility company that used a flow-through method of accounting for its July 1969 accounting period with respect to its pre-1970 public utility property other than property depreciated under the straight-line method and did not make an election under section 167(1)(4)(A) may, if permitted by the State regulatory authority, normalize the tax deferral resulting from an election to apply the class life system (a)-11. (Sec. 167, 86 Rev. Rul , C.B Depreciation; CLADR system; vintage accounts. A public utility that used the flow through method of accounting may change, under the CLADR system, its method of depreciating its 1975 vintage accounts on its 1976 tax return from the double declining balance method to the sum of the years-digits method since such a change results in a smaller depreciation expense. However, the public utility may not similarly change its method of depreciating its 1971 thru 1974 vintage accounts since such a change would result in a greater depreciation expense. Distinguished by Rev. Rul (a) 11, (Secs. 167, 446; 86 Rev. Rul. 77-9, C.B Depreciation; CLADR system; vintage accounts. A public utility that uses the flowthrough method of accounting under the CLADR system may change its method of depreciating its 1971 vintage accounts on its 1978 return from the double declining balance method to the straight line method even though the change results in a depreciation allowance greater than that computed under the double declining balance method. Rev. Rul distinguished (a) 11. (Sec. 167, 86 Rev. Rul , C.B Depreciation; equipment used for capital improvements. Depreciation on equipment a public utility owns and uses in the construction of its own capital facilities must recapitalized under section 263(a) (a)-1, 1.263(a) 2. (Secs. 167, 263; 86 Idaho Power Co., 418 U.S. 1, Ct. D. 1965, C.B Depreciation; first placed in service; electrical transmission line. An electrical transmission line constructed in 1970 that could not be energized until 1971 when substations at each end of the line were completed was not first placed in service in 1970 within the meaning of reg (a)-10, (a)-11, and (a) (a)-10, 1.167(a)-11, 1.167(a)-12. (Sec. 167, 86 Rev. Rul , C.B Depreciation; first placed in service; electric generating unit. A public utility s coalfired electric generating unit was first placed in service for investment credit and depreciation purposes on the date it was placed in the utility s control by the contractor, synchronized into the power grid, and daily operation begun, even though further testing and increasing the height of a waste disposal dam was necessary , 1.167(a)-11. (Secs. 46, 167; 86 Rev. Rul , C.B Depreciation; first placed in service; electric generating unit; pollution control equipment. A public utility that adopted the modified half-year convention under reg (1) 11 placed a coal-fired steam electrical generating unit in service during the first half of its taxable year, even though a physically and functionally separate piece of required pollution control equipment was not operational until the second half of the year. The utility is entitled to a full year s depreciation deduction with respect to the generating unit. No depreciation is allowed for that year for the pollution control equipment. Such equipment, however, will be placed in a vintage account for that year , 1.167(a)-11. (Secs. 46, 167; 86 Rev. Rul , C.B Depreciation; first placed in service; nuclear electric generating unit. A nuclear electric generating unit is first placed in service for investment credit and depreciation purposes when the unit is physically and legally placed in the control of the owners by the contractor and is fully operational, even though it is still undergoing testing to eliminate any defects and to demonstrate reliability , 1.167(a) 11. (Secs. 46, 167; 86 Rev. Rul , C.B Depreciation; first placed in service; nuclear electric generating unit. A public utility s nuclear electric generating unit, certain incidents of the ownership of which were vested in the public utility during the construction period, was first placed in service for depreciation purposes when the unit became operational, even though subsequent testing was performed and the unit was not formally accepted from the contractor until a later date (a)-11. (Sec. 167, 86 Rev. Rul. 79 8, C.B Depreciation; flow-through accounting; normalization of book and tax differences. A public utility taxpayer will not be denied the use of accelerated methods of depreciation when it prospectively normalizes all differences between book and tax accounting (full normalization) in compliance with a Federal energy Regulatory Commission order. Furthermore, the taxpayer will not be in violation of section 167(1), even if it is normalizing with respect to property previously flowed through to the ratepayers, when the balance in its deferred tax account equals or exceeds the historical amount determined by the book and tax differences directly addressed by section 167(1) (1)-1. (Sec. 167, 86 Rev. Rul , C.B Depreciation; major standby emergency parts. A public utility s major standby emergency spare parts are depreciable property and may be depreciated using an accelerated method when the parts are acquired and set aside as standby emergency replacements provided the taxpayer normalizes the tax benefits (a)-1, (Secs. 167, 446; 86 Rev. Rul , C.B Depreciation; mass asset retirements; property survivor curves. Circumstances under which a taxpayer may use statistically derived property survivor curves to determine the portion of the mass asset property retirements that are attributable to each particular year and accounted for in year-of-acquisition accounts (a)-7. (Sec. 167, 86 Rev. Rul , C.B Dividend reinvestment plans. Certain provisions of section 5c of the temporary regulations relating to public utility reinvestment plans are clarified. Notice 83-19, C.B Dividends paid credit. A public utility will not be denied a dividends paid credit, in respect of dividends paid on preferred stock issued by it on or after October 1, 1942, to replace preferred stock issued prior to such date by another corporation merely because such other corporation, at the time of replacement, was not a public utility. Rev. Rul revoked , 39.26(h)-1, (Sec. 26(h), 39 Code; Sec. 247, 86 Rev. Rul , C.B Depreciation and investment credit; fish preservation and public recreational facilities. Facilities required under Federal law to be built at a hydroelectric project for the preservation of fish and for public recreation are subject to depreciation, except for those recreational facilities that are inextricably associated with the land. The depreciable facilities are other tangible property but, since they are not an integral part of furnishing electrical energy, they do not qualify as section 38 property , 1.167(a) 2. (Secs. 48, 167; 86 Rev. Rul , C.B Dividends paid credit; nonutility income. In the case of a public utility company which has nonutility income, no apportionment of the credit allowed for dividends paid on preferred stock will be made where the nonutility income is less than 20 percent of total income, irrespective of the method used determining such total income (h)-1. (Sec. 26(h), 39 Code; Sec. 247, 86 Rev. Rul. 228, C.B Dividends paid credit; stock with accrued dividends redeemed; insolvency. A public utility corporation lost all its utility properties under a condemnation, then, pursuant to a court order, redeemed all its preferred stock at par value plus accumulated dividends. Held, the redemption was not a distribution in liquidation but a payment of dividends subject to the dividends paid credit. (Sec. 26(h), 39 Code; Sec. 247, 86 Utilities & Industries Corp., 41 T.C. 888, Acq C.B Earnings and profits; contributions in aid of construction. The earnings and profits of a regulated public utility shall not reflect contributions received in aid of the construction of facilities to extend its services, but shall reflect any gain includable in taxable income upon the disposition of such facilities; depreciation may not be claimed for such purposes except to the extent that the contributions were included in taxable income. Modified by Rev. Rul , (Secs. 312, 316; 86 Rev. Rul , C.B Easement maintenance costs; electric transmission and distribution. The maintenance costs of tree trimming and brush clearing from easements for the transmission and distribution of

3 electrical energy are deductible operating expenses and are not part of the repair allowance for the Electrical Transmission and Distributing Facilities, asset guideline class , 1.167(a)-11. (Secs. 162, 167; 86 Rev. Rul , C.B Energy credit; Public Utility Regulatory Policies Act of 1978 (PURPA); qualifying facility. Property that is a qualifying facility under section 201 of PURPA is not public utility property under section 48(1)(17) of the Code, if the rates charged are not determined on a rate-of-return basis. Therefore, such property may be energy property under section 48(1) , (Secs. 38, 48; 86 Rev. Rul , C.B Environmental impact studies. A public utility company conducted, and paid another organization to conduct, environmental impact studies to support its application to state regulatory agencies to expand its generating facilities. The expenses are not research and experimental expenditures. However, if not chargeable to a capital account, the expenses are deductible business expenses , (Secs. 162, 174; 86 Rev. Rul , C.B Excavation costs; water canal. Excavation costs of a water canal used as a conduit for circulating the water to cool an electric utility s steam-plant condenser are capital expenditures for intangible assets that do not have a determinable useful life and, hence, are not subject to a depreciation allowance. Modified by Rev. Rul (a)-3. (Sec. 167, 86 Rev. Rul , C.B Excavation costs; water canal. Costs of excavating water canals and dredging channels in harbors and slips are investments in tangible property and are depreciable if the asset is actually exhausting and the exhaustion is susceptible to measurement. Rev. Ruls , , , modified, and clarified (a)-2. (Sec. 167, 86 Rev. Rul , C.B Excess revenues collected. Revenues of a utility company in excess of approved rates during a period of rate dispute between the company and the regulatory authority are taxable income when received, even though the excess is in a restricted bank account (a)-1. (Sec. 22(a), 39 Code; Sec. 61, 86 Rev. Rul , C.B. 215; Brooklyn Union Gas Co., 22 B.T.A. 507, Acq., C.B Federal Power Commission regulations. F.P.C. regulations relating to the filing of rate schedules and applications for certificates by natural gas producers do not affect the determination of whether an association under a joint operating agreement is taxable as a corporation. (Sec. 7701, 86 Rev. Rul , C.B Freight forwarders; consolidated returns. Subsidiary corporations engaged in the freight forwarding business which derive at least 80 percent of their gross income (computed without regard to dividends and capital gains and losses) from the furnishing of such services qualify as regulated public utilities for purposes of computing tax on a consolidated return (Sec. 1503, 86 Rev. Rul , C.B Fuel adjustment charges; when included in income. A public utility that uses the accrual method of accounting is authorized to include fuel adjustment charges in its customers bills for natural gas. The charges may be adjusted every six months and are based on estimated sales for the period they are in effect, but they are intended to recover the increased fuel costs for the preceding six-month period. The utility must include the fuel adjustment charges in gross income as part of the selling price of gas sold during the period the charges are in effect (Sec. 431, 86 Rev. Rul , C.B Holding company; stock sold by order of S.E.C. New stock of a corporation acquired by a public utility holding company in exchange for old stock of the same corporation, in accordance with an order of the Securities and Exchange Commission to dispose of its interest therein, is treated as the sale of a capital asset. I.T superseded (Sec. 1221, 86 Rev. Rul , C.B Information returns; payment for use of roads. A power company that paid an individual $3,000 for the unrestricted use of certain roads on the individual s farm for a 10-year period is required to file a Form 1099-MISC reporting the payment (Sec. 6041, 86 Rev. Rul , C.B Interest on customers cash deposits; information returns. Interest payments by a public utility company on customers cash deposits are not subject to the reporting requirements under section 6049; however, payments of such interest to any one customer (other than a corporation) aggregating $600 or more during a calendar year are subject to the reporting requirements of section , (Secs. 6041, 6049; 86 Rev. Rul , (Part 1) C.B Interest on indebtedness capitalized; State requirement. A public utility corporation that capitalizes certain interest payments on its books as required by a state regulatory body is not precluded from deducting the interest for income tax purposes. G.C.M superseded , , (Secs. 163, 266, 1016; 86 Rev. Rul , C.B Investment credit; acquisition v. construction. A public utility contracted with a manufacturer of turbine generating units and with a general contractor for an expansion of its generating plant. The manufacturer exercised direction and control over installation, testing, and start-up of the turbine generating unit purchased by the utility, while the utility exercised continuing control over the important details of construction under the general contract for construction of the plant addition. The turbine generating unit was acquired within the meaning of reg (b)(6), but the addition was constructed within the meaning of reg (b)(1). The Service will not follow the Public Service Co. of New Mexico decision (Sec. 48, 86 Rev. Rul , C.B Investment credit; compressor station structures; natural gas transmission. Compressor station structures of a natural gas transmission company, individually enclosing certain massive compressor engines in such a manner that removal of a compressor unit would also involve removal of the structure housing it, are section 38 property for purposes of the investment credit; related appurtenances, such as sidewalks and sewer System, also qualify as section 38 property if they are an integral part of the gas transportation (compressor) activity and essential to its completeness (Secs. 38, 48; 86 Rev. Rul , C.B Investment credit; depreciation; power plant. A public utility that constructed property at a power plant site qualifying as pre-termination property under the equipped building rule of section 49, was eligible for 3/7 of the amount of qualified investment on that portion of the property put in service in June 1971, and 4/7 for the balance of the property completed and put in service in February 1972, which qualified as section 50 property , , 1.167(a)-11. (Secs. 46, 49, 50, 167; 86 Rev. Rul , C.B Investment credit; equipment installation service charges. Installation charges customers pay a regulated public utility, in connection with branch telephone exchange systems installed on the customers property, that it includes in gross income and treats as service charges to recoup costs of establishing the customers accounts, providing telephone books for them, and general overhead costs, do not reduce its qualified investment in the new section 38 property , , (Secs. 38, 46, 118; 86 Rev. Rul , C.B Investment credit; facility jointly owned; elections. The election to apply the Class Life Asset Depreciation Range (CLADR) system of section 1.167(a) 11 to an electric generating plant owned by a partnership is to be made by the partnership under section (b). For certain partners, their proportionate interests are to be treated as public utility property under section 1.167(1) 3. Rev. Rul amplified (a)-11, 1.167(1)-3, , (Secs. 167, 703, 761; 86 Rev. Rul , C.B Investment credit; facility jointly owned with city and cooperative. The portion of an electric generating facility owned by two investor-owned utilities as tenants in common with a municipally-owned utility and a tax-exempt cooperative may qualify as section 38 property. Amplified by Rev. Rul , (Secs. 48, 761; 86 Rev. Rul , C.B Investment credit; hydroelectric power plant structure. A hydroelectric power plant structure housing a generator and propulsion turbine is other tangible property used as an integral part of furnishing electrical energy and therefore qualifies as section 38 property , (Secs. 46, 48; 86 Rev. Rul , C.B Investment credit; liquefied natural gas facility. A liquefied natural gas (LNG) facility consisting of depreciable property having a useful life of 3 or more years, including a short section of pipeline spur, LNG machinery and equipment, and an LNG storage tank, constructed after August 15, 1971, and before January 22, 1975, by an intrastate utility engaged in both the transmission and local distribution of gas for the purpose of liquefying and storing natural gas for subsequent vaporization and distribution, is public utility property for investment credit purposes , (Secs. 46, 48; 86 Rev. Rul , C.B Investment credit; liquified natural gas facility; control house. A liquified natural gas facility control house, an enclosed structure that provides shelter and housing for the control equipment, general storage space, and working space for maintenance, operation, and control of the facility is a building as defined in reg (e) and does not qualify as section 38 property (Sec. 48, 86 Rev. Rul , C.B Investment credit; mobile voice communication service. Two-way voice communication property that is used predominantly in furnishing telephone service, having interconnection with landline telephone systems,

4 is public utility property for investment credit purposes. However, two-way voice communication property that is used predominantly in furnishing private communication service and one-way paging equipment is not public utility property (Sec. 46, 86 Rev. Rul , C.B Investment credit; natural gas pipelines. High-pressure natural gas pipelines, qualifying as section 38 property, which transmit purchased gas intrastate to and between taxpayer s local distribution systems are not public utility property and are, therefore, entitled to the full investment credit (Sec. 46, 86 Rev. Rul , C.B Investment credit; ratable flow through. A regulated public utility, that files a consolidated return with nonpublic utility subsidiaries that historically incur losses elected to flow through its investment credit as a cost of service reduction. In establishing the utility s cost of service, its regulatory agency ignores nonpublic utility income or loss and computes all components of ratemaking as though the utility was operated as a separate corporation. The amount of the investment credit that the utility flows through to income does not exceed the ratable portion allowed to be flowed through by reason of the utility s election of section 46(f)(2) (Sec. 46, 86 Rev. Rul , C.B Investment credit; recapture; sale of facility to tax exempt cooperative. The investment credit recapture implications of the sale by a public utility company of an undivided interest in its electric generating facility to a tax exempt cooperative are discussed , , (Sec. 38, 47, 761; 86 Rev. Rul , C.B Investment credit; reservoir. A res ervoir including a dam structure, roadway, and preparation of the reservoir site, constructed by an electric utility for use with a steam turbine generating plant is depreciable property and is other tangible property for investment credit purposes , , 1.167(a)-2. (Secs. 46, 48, 167; 86 Rev. Rul , C.B Investment credit; retired reusable items recovered. An electric utility s qualified investment in new section 38 property that is public utility property includes minor items that are treated as mass assets recovered from retired electric public utility property and are reused in the construction or reconstruction of electric utility property. A method for valuing the mass assets for determining basis is explained. A change to the method of valuing such items is a change in accounting method. Rev. Rul modified and superseded , , , (Secs. 38, 46, 48, 446; 86 Rev. Rul , C.B Investment credit; steam distribution system. A steam distribution system that delivers steam from the plant to the customers by means of distribution mains, valves, and meters qualifies for the investment credit as section 38 property. Rev. Rul modified , (Secs. 46, 48; 86 Rev. Rul , C.B Investment credit; steam generating facility; distribution system. A steam generating facility and its distribution system, used in the business of furnishing or selling steam to customers, are not public utility property. The steam generating facility and the distribution system may qualify as section 38 property , (Secs. 46, 48; 86 Rev. Rul , C.B Investment credit; submarine cable system. Submarine cable and submarine cable repeaters that are functionally used at terminals of the communication systems extending from California to Hawaii qualify for the investment credit (Sec. 48, 86 Rev. Rul. 69-2, C.B Investment credit; tax credit employee stock ownership plans (TRASOPs). Eligibility of a public utility for the TRASOP credit is not dependent on a taxpayer s ratemaking treatment of its regular investment tax credit (Sec. 46, 86 Rev. Rul , C.B Investment credit and depreciation; flow-through accounting method. A public utility that uses the flow-through method of accounting for accelerated depreciation with respect to property to which section 167(1)(2)(C) applies, and has made elections under section 46(f)(3) and (8) to use the immediate flow-through method of accounting for investment credit, will not have the investment credit disallowed by reason of the appropriate regulatory body allowing it to account for the investment credit in a manner described under either section 46(f)(1) or (2) (1)-1. (Secs. 46, 167; 86 Rev. Rul , C.B Investment credit and depreciation; gas utility pipeline and LNG plant. Gas utility trunk pipelines, owned by a regulated public utility that operates in a metropolitan area, that deliver gas from city gate stations to other points in the utility s system are public utility property within the meaning of section 46(c)(3)(B) and are classified only under asset guideline class as set forth in Rev. Proc Liquified natural gas (LNG) plants are not classifiable under the CLADR system if placed in service during taxable years beginning prior to January 1, , 1.167(a)-11. (Secs. 46, 167; 86 Rev. Rul , C.B Investment credit and depreciation; oil pipeline. An oil pipeline owned by an electric utility company and used to transport oil between the company s dock and its inland generating facility is public utility property within the meaning of section 46(c)(3), and for depreciation purposes under the CLADR system the pipeline is included in asset guideline class 49.13, Electric utility steam production plant, rather than asset guideline class 46.0, Pipeline transportation , 1.167(a)-11. (Secs. 46, 167; 86 Rev. Rul , C.B Legal and accounting expenses; research project. The expenses for legal and accounting work incurred by a taxpayer in apply - ing for a Federal income tax ruling in connection with a research and development project and a determination of a regulatory commission with respect to the effect of the project on the taxpayer s rate structure are not deductible as research and experimental expenditures. The expenses, if not chargeable to capital account, are deductible business expenses , (Secs. 162, 174; 86 Rev. Rul , C.B Natural gas; inventory; gas in transit. Natural gas in the pipeline distribution system of a public utility that has obtained title to the gas, which will ultimately be resold to its customers, is merchandise in transit and must be included in the utility s inventory. Rev. Rul amplified (Sec. 471, 86 Rev. Rul , C.B Natural gas corporation; accounting method. A natural gas company which is required by the Federal Power Commission to capitalize on its books interest, taxes and intangible drilling and development costs, but which deducted them for tax purposes, can deduct them in computing earnings and profits (Sec. 312, 86 Rev. Rul , C.B Natural gas transmission costs; inventory. A gas transmission company transmitted purchased gas through its pipeline to customers and to an underground storage facility. In accordance with Federal Power Commission rules, transmission costs were not included in the inventory cost but were deducted currently. Held, for purposes of section (b), the gas was acquired before the transportation costs were incurred and the current deduction was proper. (Sec. 471, 86 Northern Natural Gas Co., 44 T.C. 74, Acq. in result, C.B Natural gas transmission costs; in ventory; linepack. Line pack gas should be included in inventory of a natural gas transmission company; a change from expensing to inventorying such gas is a change in the method of accounting. Amplified by Rev. Rul , , (Secs. 446, 471, 481; 86 Rev. Rul , C.B Net operating loss carryover; intrastate airline. A common carrier domestic corporation deriving more than 80 percent of its gross income from sales of intrastate air transportation, that is subject to CAB jurisdiction but is granted exemption from CAB regulation because its flights cross the state boundary due to FAA routing, is a regulated transportation corporation and is entitled to the seven year net operating loss carryover , (Secs. 172, 7701; 86 Rev. Rul , C.B Nuclear fuel elements. The purchase costs of nuclear fuel elements used to power nuclear reactor plants generating electricity are capital expenditures subject to depreciation. The useful lives and salvage values of the fuel elements are questions of fact, Clarified concerning the terminology used for nuclear fuel assemblies (a)-1, 1.263(a)-2. (Secs. 167, 263; 86 Rev. Rul , C.B. 198; Rev. Rul , C.B Pollution control facilities; smokestack. A smokestack for a steam electric generator of a public utility to be constructed to disperse pollutants at a high altitude, although certified by a state pollution control authority as in furtherance of the purpose of abating or controlling pollutants, will not qualify as an air pollution control facility (Sec. 103, 86 Rev. Rul , C.B Promotional payments. Promotional payments in the form of cash allowances made by a public utility company to individuals or building contractors to encourage construction of all gas homes or to convert heating, hot water, or other systems to gas are capital in nature recoverable through depreciation. The investment credit will not be allowed for these assets. The other expenditures, such as salaries and advertising, are deductible business expenses. Distinguished by Rev. Rul with respect to bonuses and commissions paid to secure hot water heater leases , , , 1.167(a)-3, 1.263(a)-2, (Secs. 38, 48, 162, 167, 263, 461; 86 Rev. Rul , C.B Proper application of the normalization requirements. A new regulations project will consider the proper application of the normaliza-

5 tion rules to public utilities filing consolidated federal income tax return. Notice 89-63, C.B Public utility; telephone wires replaced with buried cable. The cost of replacing telephone wires with buried cable is to be capitalized and depreciated over the useful life of the cable , 1.167(a) 1, 1.263(a) 2. (Secs. 162, 167, 263; 86 Rev. Rul , C.B Relocating capitalized physical assets. Labor and transportation costs for relocating the existing capitalized physical assets of a group of regulated electric utility companies that maintain and operate integrated electric systems including production, transmission, and distribution facilities are deductible as business expenses (Sec. 162, 86 Rev. Rul , C.B Reorganizations; S.E.C. order. Pursuant to an S.E.C. order satisfying the conditions of section 1081(f), a parent corporation in a system group consisting of the parent and two wholly owned operating public utility companies merged one subsidiary into the other and substituted bonds of the acquiring subsidiary for identical publicly owned bonds of the acquired subsidiary in transactions described in section 1081(a) and (d)(1)(a). No gain or loss was recognizedon any of the transactions (Sec. 1081, 86 Rev. Rul , C.B Repayments; FPC order. In determining whether 80 percent or more of a regulated public utility company s gross income (computed without regard to dividends and capital gains and losses) for the taxable year is derived from sources described in section 1503(c), any refunds or repay - ments made pursuant to an order promulgated by the F.P.C., or other governmental body, instrumentality or agency as defined in such section, shall not be taken into account in determining gross income (Sec. 1503, 86 Rev. Rul , C.B Rulings on normalization requirements. Instructions are provided for public utility taxpayers requesting rulings on normalization requirements of sections 46(f), 167(1), and 168(e)(3). Rev. Proc amplified , 1.167(1)-1. (Sec , S.P.R.; Secs. 46, 167, 168, 86 Rev. Proc , C.B Settlement of treble damage claim; Clayton Act. Guidelines are prescribed for the proper tax accounting for amounts realized by regulated public utilities in settlement of civil suits for treble damages under section 4 of the Clayton Act , , , , (Sec , S.P.R.; Secs. 61, 111, 162, 1016, 86 Rev. Proc , C.B State expenditures for public improvements. Portions of the property accounts of railroad and public utility companies that represent expenditures paid by a state for public highways or other public improvements are neither gifts nor contributions to capital and have no tax basis for depreciation or gain or loss (a)(8)-1, 1.167(g)-1, , (Sec. 113, 39 Code; Secs. 167, 1015, 86 Rev. Rul , C.B Telephone; inside wiring. The cost charged to the inside wiring account of a public telephone company is a capital expenditure under section 263 and must be recovered under section , 1.263(a)-2. (Secs. 162, 168, 263; 86 Rev. Rul , C.B Transmission and distribution lines; installation and relocation expenses. Expenditures incurred by a regulated public utility for the Installation of new sections of overhead and underground electric transmission and distribution lines to take the place of retired lines that interfered with the construction of an expressway are capital expenditures. However, the costs of temporary relocations of existing power lines to maintain continuous service during the construction period of less than a year are deductible as business expenses (a)-1. (Sec. 263, 86 Rev. Rul , C.B Unclaimed refunds; contributions to capital. Unclaimed refund amounts resulting from a tentative rate increase collected under bond that a public utility, in compliance with a State public service commission order, spends in its rural construction program, are not contributions to capital. Since no consent to basis adjustment prescribed by regulations under section 1017 was filed, the utility must report gross income in the year the amounts became refundable. It is entitled to a basis in any assets acquired with the unclaimed refunds , 1.108(a)-1, , , (Secs. 61, 108, 111, 118, 362; 86 Rev. Rul , C.B Voluntary payment in addition to franchise tax. Voluntary payments made by a public utility company to municipalities in addition to the franchise tax imposed on its gross receipts from within the municipalities, pursuant to letter agreements providing that the company will continue the additional payments as long as it is the sole franchisee within such municipalities, are deductible as business expenses (Sec. 162, 86 Rev. Rul , C.B. 37.