FPC v. UNITED GAS PIPE LINE CO.
Legal provision: Natural Gas, or Natural Gas Policy Acts
Argument of Howard E. Wahrenbrock
Chief Justice Earl Warren: Number 127, Federal Power Commission, petitioner versus United Gas Pipeline Company et al, number 128 Memphis Light Gas and Water Division, petitioner versus United Gas Pipeline Company et al. number 79, -- no, those are the only two.
Mr. Howard E. Wahrenbrock: Your Honor, may it please the Court.
These cases bring before the Court a decision setting aside a rate reduction by the Federal Power Commission.
The Commission reduced the rates of the United Gas Pipeline because so far as is here involved, United Gas Pipeline had estimated its rates upon the basis of the inclusion of an allowance for federal income taxes based upon the usual corporate statutory rate of 52% it applied -- would apply if United filed a separate return but as a matter of fact, United joins with its affiliates in filing a consolidated return.
And under the consolidated return, the total tax for the group is less than the total of the separate return taxes because some of the group particularly United's producing affiliate union regularly enjoys tax losses and those tax losses have to be absorbed by some of the taxable income of the rest of the members of the group and as a result of that absorption, the group tax is less.
These lawsuits result from the fact that union enjoys the special deductions that most oil and gas producers enjoy.
I refer to the provision for the expend thing of productive well intangible drilling costs and the provision for depletion at the statutory percentage of income.
Union is in fact highly profitable over at the five-year-period for which tax information is particularly irrelevant here; its net income have reached $14 million a year.
The Commission --
Justice Potter Stewart: There's another consolidated company in here too, its overseas or somebody?
Mr. Howard E. Wahrenbrock: Yes, it participated only one -- in only one of these five years and had a $25,000.00 loss which is negligible for these purposes.
Justice Potter Stewart: It's the producing company which has got the live share of these --
Mr. Howard E. Wahrenbrock: Yes.
The producing company's average tax loss over the five-year-period was $800,000.00 a year.
Justice John M. Harlan: Did both of these -- either of these one jurisdiction companies have an income (Inaudible)?
Mr. Howard E. Wahrenbrock: All of the companies had taxable income and in one year union itself had taxable income.
In one year, no other company other than United Gas Pipeline had taxable income.
They all had losses in one year.
Justice Byron R. White: Do you say the producing companies the one that in this case that is responsible for the losses?
Mr. Howard E. Wahrenbrock: Yes.
On the average, it has an $800,000.00 a year of loss.
There are occasionally were losses by other companies.
Justice Byron R. White: What source of loss in the producing company, this what -- there were declaration expenses at all?
Mr. Howard E. Wahrenbrock: The sources of the loss are these two provisions for deduction of intangible drilling cost and statutory depletion.
The rates were here tested by the Commission and new rates fixed upon the basis of the so-called cost of service method that the Commission has used since rates fixed by that method were first approved by this Court in the Hope case in the 1940's.
Under that method, the Commission determines the average unit cost of service on the basis of the business done in the test year including a fair return on the amount prudently invested in the business after income tax.
Justice Byron R. White: What business?
Mr. Howard E. Wahrenbrock: In the regulated business, the business for which the rates are regulated.
Justice Byron R. White: So, you account separately for the -- in making rates for the regulated business and the unregulated?
Mr. Howard E. Wahrenbrock: That's right.
We make -- if our company has both regulated and unregulated business there has to be an apportionment.
Because of the year to year variations in the level of taxes paid on this consolidated return, the Commission looked to taxes not only for the test year but for a representative period of years, five years and there is no question in this case that the period of years from 1957 to 1961 that the Commission used was a representative period for that purpose.
The Commission determined United share in the consolidated return taxes for those five years in this manner it divided the group's total taxes for the five-year-period by five to determine the average consolidated tax paid by the group in each of those -- over that five-year-period.
And it allocated a proportionate part of that average consolidated tax to United on the basis of United's -- the relationship of United's taxable income on a separate return to the total taxable incomes on separate returns that United was 92.11% of the total, 92% produced the share that was allocated to United and the Commission determined that that share amounted to 50.04% of United's taxable income on a separate return.
And therefore, it estimated that over the future years for which this rate would in effect, United as a participant in the consolidated return would have to pay taxes that could be estimated on the basis of this past experience at this -- as an effective consolidated return rate that United's taxes would in effect be 50.04% instead of what its rate would be on a separate return basis 52%.
And using that as an estimate, the result was that the rate -- rates the Commission fixed in effect allowed United for every 50 cents of return, 50.04 cents for income taxes.
Not less, because the company is entitled to the fair return, the intended fair return after taxes not more because the rate payers entitled to the lowest reasonable rate.
It was this apportionment that the court below set aside said that the Commission doesn't have power, doesn't have jurisdiction to make such an apportionment.
It did this by a short per curiam opinion and which have attempted no rationalization of its own but referred to the decision of the Tenth Circuit in the City Service case that have been decided in October of 1964, and said that the principles of that decision were applicable in controlling here.
The Tenth Circuit had said that the 52% a tax upon the regulated company at 52% represented its actual tax liability that the consolidated return reduction is due to the tax losses of the loss companies ignoring any need that those losses be absorbed before there can be a reduction.
And that is said that to apportion any part of the -- to the regulated company of the tax reduction is to assign to it the tax consequences of profits or losses as the case may be of other businesses other than the business of his being regulated and said that that transgress the jurisdictional limits Congress had imposed upon the power commission.
Justice John M. Harlan: Did the Commission -- they were to granting a (Inaudible)?
Mr. Howard E. Wahrenbrock: No.
The petitions for certiorari in this case presented only the question of the Commission's power to make an apportionment not any question of the Commission's -- the method of apportionment that had not been commented upon by either of the Court's all that had -- the really been litigated objected to before the Commission or the court below and certainly all that have decided was that the Commission did not have power and I shall therefore confine my argument to the question of power.
The assumption --
Chief Justice Earl Warren: May I just too, wherein myself is -- would there be an oversimplification of the matter to say that the Commission will take into consideration in -- even though the consolidated return is made only the income of the regulated that is the tax condition of the regulated company without reference to the non-regulated companies that are associated with it or in its combined --
Mr. Howard E. Wahrenbrock: The Commission applied to the regulated business a tax rate which represented what this experience over the pass year of five years had shown was the effect of allocating a share to United of the total affiliated group's tax payment.
Now, the assumption that there is anything actual about a 52% tax liability for United under the circumstance of this case is simply wrong.
The only source of any tax liability is of course the Internal Revenue Code and when a consolidated return is filed, the internal revenue code is as explicit as language can be that there is only one liability -- liability for the tax, for the consolidated group.
Each member of the consolidated group is liable for that total tax.
The parent corporation under the internal revenue regulations, apparent corporation generally acts as the sole agent for the group making filing the returns and dealing with the internal revenue service.
There is nowhere in the code, any provision for any lesser tax liability than the total group tax liability and the code is explicit that there may be no contract entered into among or by among the members of the consolidated group or with anyone else, that affects alters or affects that total liability or that liability so imposed in any manner.
Now, there is no expressed contention in this case that I know of, that the Internal Revenue Code or the regulations do not make that consolidated tax liability a joint tax cost on all members, but two claims are made that it is not a joint cost that are in direct conflict with the code provisions as well as effectuate erroneous and I want to take up those two-principle plans.
A witness for United testified that the producing company union could've absorbed these losses out of its own taxable incomes it if -- it itself have filed separate return.
Union and one of these five years had taxable income.
In the other four years it had tax losses, on the average its tax losses exceeded its tax -- taxable income, but the claim is made that if it could use on a separate return it's carry over and carry back provisions.
It could absorbed its own, there were no figures put in to support that claim.
The only figures that are in the record are the claims, are the figure showing that the average on the average its tax losses exceed its taxable income by $800,000.00 a year.
The result is that -- if those figures are representative and there's no question that they are, that the longer you carry it back the more your -- your taxable losses exceed your taxable income or the longer you carry it forward.
So, it must be a reasonable conclusion that the carry back and carry forward would not enable union to absorb the tax losses.The on cross-examination union's witness attempted to buttress his position.
He said union could change its method of doing business, it could sell production payments and thereby anticipate future income, a new side income realizing its income immediately to absorb its losses or it could alter its well drilling program to avoid incurring excessive losses at a time when it couldn't absorb.
But rates, if the Court please are not fixed on self-serving speculations as to alternative ways that business could be done and not be taxed so much or taxed less.
Justice Byron R. White: But -- isn't there -- is there another answer to that claim?
Let's assume it's true, absolutely true that the union could have absorbed all of these losses and put his income to do it, there is no question that the -- is that critical in your case?
Mr. Howard E. Wahrenbrock: Well, there is of course the fact that they have elected to file a consolidated return --
Justice Byron R. White: In fact, that some of the losses have been charged against the regulator.
Mr. Howard E. Wahrenbrock: They have elected to file a consolidated return presumably because that means that it is beneficial to them to make that election.
Justice Byron R. White: And as a matter of fact to the consolidated return to reduce the taxes of the regulated company.
Mr. Howard E. Wahrenbrock: On a separate return the regulated --
Justice Byron R. White: Because some of the losses are charged to get it against of income.
Mr. Howard E. Wahrenbrock: On a separate return, the regulated company would have higher taxes than a total of its taxes and the taxes of the other companies on a separate return basis would be higher than on the consolidated basis because of the absorption of the losses.
The group having elected this method, it is hardly persuasive for it now to say when its rate comes under scrutiny that it could have achieved the same benefit by filing separate returns and in any event, what might have been true on separate returns is irrelevant.
They have made the election and they filed a consolidated return.
The other claim that is made is that the participation and the consolidated return by United does not increase the consolidated return rate reduction and this is attempted to be demonstrated by a table that is set forth on page 23 of United's brief, that's the white brief, the small white, the square bound edge, page 23.
Now, this table is the counterpart of a table that appears in the Gas -- City Service opinion, turn it to facts of that case, such a table can be made wherever over the period of years for which taxes are being scrutinized.
The total losses of the group can be absorb by some -- by the taxable income of the group without including the taxable income of the regulated company, but it does not prove, it assumes the question to be proved is to what justification there is when a consolidated return is filed and there are two corporations as here, Gas Service Corporation -- Gas Corporation and United both of whom have taxable incomes.
What reason there is for assuming that taxable income of the company that is not before the Commission is the taxable income that absorbs the tax losses?
The group can turn right around when Gas Corporation's rates are under review in the States of Texas or Mississippi or Louisiana and construct the counter part of this table and say that Gas Corporation's participation in the group was not necessary because United's income would've absorb it all.
There is no suggestion of any reason any economical justification for preferring one corporation, one taxable income corporation over another taxable income corporation to use that one's income over the other in the absorption of the losses.
As a matter of fact, United has about 10 times as much taxable income as Gas Service Corporation on the average.
In one year, Gas Corporation, the state regulated corporation has had no taxable income so in that year, the losses of Union had to be absorbed by United's because under the code and the regulations, the taxable losses must be absorbed by the taxable income of that year -- of the current year before there can be any use of carry-back or carry-over.
In another year, Gas Corporation had some taxable income but not merely as much as the taxable losses.
So, that in true of the five years that were representative, Gas Corporation taxable income could not include the taxable losses of that year, it had to be United's that absorbed on that year under the provisions of the code.
The table therefore which assumes the question to be answered it assumes that Gas Corporation's income should be regarded as absorbing the tax losses is just a reminder of the old carnival game, the money is in under a corporate shell you're looking at.
The joint nature of this tax cost is substantive is not merely formal.
The purpose of the code provisions that produced Union's tax losses, the provisions for percent of income depletion and for the expensing of intangible well drilling cost, congressional purpose in making those provisions it is well established is to encourage the exploration and development of oil and gas properties.
The relation of that purpose to the regulation of gas rates, under the Natural Gas Act has been eliminated by Judge Tuttle's opinion for the Fifth Circuit in the El Paso Federal Power Commission rate case in 1960.
Judge Tuttle there began by noting that in fixing rates the return on investment is itself fixed high enough to attract additional capital for necessary expansion to the business.
Judge Tuttle continued this does not mean that the tax savings that are produced by intangible well drilling and statutory depletion provisions are to constitute a profit over and above a fair rate of return, because the congressional purpose of these tax benefits can be achieved by translating them into reduced rates that will enable more gas to be sold in competition with other fuels and the importance to United Gas Pipeline of competition need not be argued because it was argued before this Court, this term by United's own counsel, Mr.Woods in the abandonment case, United against -- Gas Pipeline against Federal Power Commission.
When Mr.Woods pointed out in this prime -- a slight reflection in Mr.Justice White's opinion in that case near the end, Mr.Woods pointed out that United had to buy its gas at the very lowest rate it could buy that in order to enable it to continuance to maintain its sales of industrial gas in the market against competing fuels.
Now, if competition is that important to United, a failure to translate these tax benefits into reduced rates allowing them to result in increasing United's rates will have the effect of constricting the marketability of the gas.
The marketability of the gas is constricted.
It will be impossible for Pipeline's to show the necessary marketability and the economic feasibility of expansions and without expansions these tax benefits can never achieve their purpose of providing an incentive that will successfully encourage exploration and development because there will not be the demand upon the part of Pipelines that will unable that -- will make that attractive.
Justice Byron R. White: Well the rate on this -- on the Government's basis the rates have to change every year when the business fortunes of related companies keep changing, sometimes they have income, sometimes they don't if all the entities in this consolidated group had income, I suppose the regulated company would have some tax to pay perhaps 52%of the --
Mr. Howard E. Wahrenbrock: The element that I understand your question to relate to his the tax element and that was the reason instead of using as the Commission usually uses a test year, a single test year which normally in the case of the normal utility, electric utility or gas pipeline is a sufficient basis for estimating the future, the Commission did not confined itself to one year but looked to five and there was no question in this case that that is representative.
Now, looking to five years it fines what the average tax was -- and because of there were these variations from year to year but finding that five years was representative it took that experience that effective rate of 50.04% instead of 52%.
Justice Byron R. White: That you apply the same rule to a single entity, suppose one corporation has the regulated department in a non-regulated department then the unregulated department has the losses and the corporation pays no tax because of those losses.
I suppose you apply the same rule to that, don't you?
Or do you have any such experience?
Mr. Howard E. Wahrenbrock: There is so far as I know no question, no case and which the Commission has considered that question and decided it.
The El Paso case --
Justice Byron R. White: But it would, it would sound like in a fortiori case.
Mr. Howard E. Wahrenbrock: In every case, the Commission makes an allocation of cost between the regulated and unregulated business and then the Hope Natural Gas, the Colorado Interstate case which was decided the same year of the Panhandle case that has been cited by our opponents in this case.
Mr.Justice Douglas pointed out that in that kind of a case, the allocation that the Commission made by the usual accounting method between the regulated and unregulated business of the single corporation was all that was necessary that that satisfied the requirements of separating regulated and unregulated business.
Justice Byron R. White: Does an unregulated business ever have a loss?
Mr. Howard E. Wahrenbrock: Ever have a what?
Justice Byron R. White: Does an unregulated -- does a regulated business ever have a loss at the end of the year?
Mr. Howard E. Wahrenbrock: Well, the mark of utility earnings, the fixing of fair return is to allow such a return that they will be able to continue in business and to continue to attract back capital.
Justice Byron R. White: So, I gather it's just academic to ask you, what you do about this problem that if the regulated company has a loss.
Mr. Howard E. Wahrenbrock: We, -- our Commission has had no experience with that.
there have been trams -- electric speed railways, there have been railroad problems that I think provide no particular answer here.
The importance --
Justice Byron R. White: But in any event, if a regulated company did have a loss over every year for five years you would still allow that tax -- in setting rates you'd still allow the tax benefit even though they paid no tax?
Mr. Howard E. Wahrenbrock: What we had -- the Union producing company itself was in a rate case before the Commission.
It was decided just four months before this case was decided by the Commission and in that case, inconsistently with the claim made here that these reductions belong to the loss company to union.
Union didn't there concede any negative tax.
Union in fact was claiming a 52% tax in spite of the fact it was enjoying tax losses every year.
The Commission allowed it, a zero tax or I think that answers Your Honor's question, no tax because it wasn't paying any.
Justice Byron R. White: Well, how does the -- how does the regulated company then ever get its rate up to what they ought to be?
Mr. Howard E. Wahrenbrock: It has all of its cost of service including a fair return on its investment allowed in its rates.
It just is not allowed any money in its rates for taxes that it doesn't pay.
Justice Byron R. White: Yes, but if the regulated company is losing money because of insufficient income, I would suppose its rates are (Voice Overlap).
Mr. Howard E. Wahrenbrock: It's losing money if Your Honor please here --
Justice Byron R. White: Well, I understand in this case.
This is different case here?
Mr. Howard E. Wahrenbrock: These are tax losses not real losses.
Now, the --
Justice Byron R. White: Well, you don't think intangible drilling costs aren't real losses?
Mr. Howard E. Wahrenbrock: Right.
Justice Byron R. White: They certainly cost a lot of money.
Mr. Howard E. Wahrenbrock: Judge Tuttle's observations in the -- Judge Tuttle's observations in the El Paso case are particularly relevant here in spite of the fact that the consolidated -- the El Paso case did not involve a consolidated return because El Paso involves in a single corporate entity both a regulated pipeline system like United's and a production department like Union and the purpose -- one of the purposes of the consolidated return is to enable an affiliated group of corporations constituting an economic entity, the same privileges and benefits in paying their taxes as though they were a single corporation.
In other words, the purpose of the consolidated return -- a purpose of the consolidated return is to enable a group like this group to treat its tax losses the same way it would if it were single corporation such as El Paso and that United group is an economic entity unified economic entity we discuss a great length in our brief.
I just here want to quickly point out that these corporations are united by 100% common ownership of all stock and debt, long-term debt that gas corporation obtains 96% of its gas supply from United that Union producing company sells 80% of its output of gas to United that the affiliation of the companies assures that there will be a continuation of this relationship and that United will continue to provide a market for Union as Union seeks to expand its output and that United will provide a supply of gas for gas corporation as long as gas corporation continues to need an increasing supply and that United will have its ability to do that enhanced by the fact that United is a much larger corporation than either of these two that it has much larger non-affiliated supplies and much larger non-affiliated markets that it does not have to continue to supply and therefore is in a strong position to continue to maintain the position of its two affiliates, that United is a consistent source of absorption of the taxable losses of the affiliated group and that United provides the vehicle for translating these tax losses not utilized by Union itself into the benefits that Congress intended them to achieve.
I'd like to --
Justice John M. Harlan: What is the difference between -- what is the reason of the Commission's rejection that is there on the (Inaudible)?
Mr. Howard E. Wahrenbrock: The difference there was a difference in the method of allocation of share and --
Justice John M. Harlan: I understand that but I (Voice Overlap) --
-- and not a question of power and therefore not here so far as I can quickly make a suggestion.
It seems to me that the principle factor that was involved was that under the particular relationship of the corporations that were there involved.
Those corporations could've been realigned corporately very easily.
As a matter of fact before we could bring the case -- could've brought the case to this Court, the holding company, the parent corporation had disposed of enough of its stock in the regulated company and that the regulated company was no longer a member of the affiliated group with that possibility of change that would affect the tax rate; there was no occasion for pressing it there.
The Commission seems to me to have been seeking to avoid using as a basis for determining the taxes would be paid, an assumption that could be easily avoided by re-incorporation and it therefore left to one side those non-regulated companies that could be reincorporated and incorporate with in one corporation enough income to absorb all of the losses that were producing the reduction there.
I'd like to reserve the rest of my time if I may for rebuttal.
Chief Justice Earl Warren: You may.
Argument of Reuben Goldberg
Mr. Reuben Goldberg: Mr.Chief Justice, may it please the Court.
I'd like to before launching into our argument the Court's convenience and information, draw the Court's attention to the fact that in the printed record at page 24 of volume 2, there appears the reproduction of an exhibit presented by the petitioner Memphis in that case which shows the taxable income or tax loss situation during the representative period in those cases.
I mentioned that reference because it has been referred to by Mr.Wahrenbrock in his argument.
Justice Byron R. White: What volume is that?
Mr. Reuben Goldberg: Volume 2, it's all in one on a printed record, volume 2 of the lower court record has been incorporated.
Justice Hugo L. Black: At page what?
Mr. Reuben Goldberg: Page 24.
I might also say Mr.Justice White that if a regulated company is suffering real losses not tax losses, it means that it needs a rate increase so that it will be earning a fair return and recover all of its operating costs.
In that situation, if the case were before the Federal Power Commission, the Commission would determine what the fair return is and what recovery of operating expenses are required and on the basis of that income determine what actual tax liability --
Justice Byron R. White: There would be.
Mr. Reuben Goldberg: -- there would then be and it will allow it in the cost of service.
Justice Byron R. White: Even though and it would go on allowing it even though the company continued to have losses because somebody has made a mistake.
Mr. Reuben Goldberg: Well, if the Commission has correctly forecast --
Justice Byron R. White: Yes, but I think let's assume they haven't.
Mr. Reuben Goldberg: If they haven't, the losses would continue and there has to be a further review of the rates.
Justice Byron R. White: And yes, and they would -- but they would continue to allow the tax?
Mr. Reuben Goldberg: Yes.
Justice Byron R. White: Give them a tax.
Now, the only point being that there are circumstances under which the tax factor its calculated in the rate although the tax has been paid.
Mr. Reuben Goldberg: Only because the forecast as to the future doesn't turn out that way and if it turns out that in fact the tax liability is less than the Commission had forecast and this indicates that there ought to be a rate reduction the Commission would have the power to review it.
Justice Byron R. White: And I suppose you position is in this case that the five-year-period is a forecast?
Mr. Reuben Goldberg: It is --
Justice Byron R. White: Really, it has to forecast as to what tax liability actually will be in the future.
Mr. Reuben Goldberg: Precisely and the Commission used this five-year span rather than the single span to try to be as certain as it could be in forecasting that this would be the actual situation.
The legislative history of the Natural Gas Act under which this case arises is unusually informative and instructive on the very issue in this case.
It informs and instructs that the Commission's treatment of the tax-saving resulting from the consolidated income tax return is fully authorized and sound and that the treatment contended for -- by United in this case was regarded by Congress as detrimental to consumers and was intended to be prevented by the Commission in the administration of the Natural Gas Act.
The relevant history of the act begins with the Federal Trade Commission's comprehensive investigation of the electric and gas industry in the 1930's.
That investigation revealed that when the consolidated tax return was filed by an affiliated group of companies, it was the practice of the parent to deny any share of the tax savings to the subsidiaries.
What the parent did was to appropriate all of the tax saving to itself as profit and it accomplish this by requiring these subsidiaries to pay to the parent an amount of federal income taxes which the parent would have paid if instead of joining in a consolidated return it had filed a separate tax return.
And by this device the parent then collected from the group an amount for federal income taxes in excess of the actual taxes paid to the treasury department and the difference was pocketed by the parent this profit.
At the same time, the subsidiary recorded the amount have paid the parent in its accounts as its federal income tax cost and regulatory commissions in fixing rates required the consumers to pay rates based upon this tax which was never paid by anyone to the United States treasury.
The Trade Commission reported to Congress that the operating expenses of the subsidiaries were thus inflated, that was the word they used, and the inaccurately recorded again using their words of the true cost of operations.
And Congress was informed that the operating subsidiaries were "entitled to the benefit of any tax savings to the group due to the filing of a consolidated income tax return."
They went on to say that this should be done on the basis of a proportion of the taxable income and I might address for a moment to say this is precisely the end-result of the Commission's method of allocation in this case.
The Trade Commission recommended the enactment of remedial legislation to curve and prevent this and other financial and accounting practices which should describe as the detrimental to the consumers.
As Mr.Justice Douglas stated in the Hope case, reported in 320 U.S.referring to the Natural Gas Act using his words Congress addressed itself to these "specific evils."
To prevent this exploitation of consumers by this practice and others Congress armed the Commission with comprehensive rate making powers and these are revealed in Sections 4 and 5 of the Act and additionally, it gave the Commission complete control of what was to be recorded in the accounts of the natural gas companies in Section 8 of the Act and they went so far as to even give the Commission the power to examine the records of affiliated companies even though they were unregulated with respect to transactions that bore on the business of the regulated company.
As Congress intended and as the Commission's statutory authority contemplated.
The Commission with Court approval through the years has given no order to fictitious cost in accounting and in rate making has steadfastly refused to settle consumers with fictitious cost including fictitious tax loss.
And where the natural gas company has participated in a consolidated tax return the Commission in fixing the regulated utilities rates has refused to include a hypothetical tax allowance based on a separate tax return basis as in this case it has included in the cost of service only a tax allowance at the effective tax rate resulting from participation in the consolidated tax return.
Justice Potter Stewart: I seem to remember in the briefs that your co-counsel in the other side don't agree with you about the Commission practice.
Mr. Reuben Goldberg: They mentioned one case, if I recall.
Justice Potter Stewart: No.
They said, there's only one case that seems to look in your favor, they mentioned several cases on the other side if I remember correctly from the briefs.
Mr. Reuben Goldberg: Mr.Justice Stewart, they argued that the case as we cited at page 15 of our brief are not cases which involved non-regulated tax losses but they are in error.
The cases which involved companies of the Columbia Gas System in that list of cases for example the Atlantic Seaboard Corporation, United Fuel Gas Company, Cone Gas Company, I think Penn-York is another, involved a group of companies one of which at least was a non-regulated oil company.
So, we have precisely the same kind of situation we have here.
To the extent that there has been any deviation from that long established practice that was only in the Owen case that was decided in 1957 is reported in 17 FPC at 685.
And in that case, the Commission in its opinion described the circumstances of the case as and I use the Commission's words, well not unique and the case itself virtually sui generis, the end of the Commission's quotation.
And the Commission went on in that case at page 696 of its reports to say that the examiner's decision in their case and its own decision were not to "stand as president for fixing just and reasonable rates for any natural gas company in any future case."
So that I think we may fairly say that except to that case which the Commission said wasn't to be a precedent.
What the Commission has done in this case in insisting upon including in cost of service and imposing upon consumers in rates only an actual tax liability that it has been a long established consistent administrative practice and Memphis submits if the Court please that if the decision of the court below is permitted to stand we will have returned to the practices detrimental to consumers which the trade commission condemn and which Congress acting on the Trade Commission's recommendations wanted to prevent by passing the Natural Gas Act as well as parts 2 and 3 of the Federal Power Act in 1935 and the public -- the Holding Company Act with respect to holding companies and that's because United wants the consumers to pay in rates a tax that is not paid to the treasury and which United's own brief and it seems to us concedes will simply mean additional profit to the parent United Gas Corporations.
Justice Byron R. White: Well, Mr.Goldberg, how does on the regulated companies actual, let's say it's a profit and loss statement at the end of the year.
Say a certified accountant was certified to what its income -- that income was at the end of the year.
What figure would it show as for taxes pay?
Mr. Reuben Goldberg: In a balance sheet (Voice Overlap) --
Justice Byron R. White: In an operating statement.
Mr. Reuben Goldberg: In an operating statement prepared by the certified public accountant.
He would probably reflect what the company had done or the group had done amongst themselves under the tax loss it would have to be an allocation which allocation is --
Justice Byron R. White: Yes, an allocation but the -- in terms of this one company how much cash tax actually goes out?
It's only it's out of the share of the taxes that actually goes out.
Mr. Reuben Goldberg: That's what he would report went out as taxes.
Justice Byron R. White: And so it's operating statement would just show that the actual tax expense or the tax charge begins income with only be the actual cash outgo for that --
Mr. Reuben Goldberg: Actual cash transferred from the subsidiary to the parent.
Justice Byron R. White: Yes, that would only -- so, it wouldn't be 52% it would be 50%.
Mr. Reuben Goldberg: It would be whatever the parent had dictated should be done to the subsidiary and in the days before the Natural Gas Act the parent dictated --
Justice Byron R. White: No, I'm talking about now.
Mr. Reuben Goldberg: Well, even today unless the Federal Power Commission's regulation is involved the --
Justice Byron R. White: Well, let's just take a (Inaudible) assume that without the consolidated statement incorporate that the regulated company would have paid $50,000.00 to federal income tax?
Mr. Reuben Goldberg: To the treasury?
Justice Byron R. White: To the treasury.
Mr. Reuben Goldberg: Yes.
Justice Byron R. White: With the consolidated statement if share of net of income taxes is $25,000.00.
Mr. Reuben Goldberg: In preparing a proper operating statement it should show federal income taxes only at this $25,000.00.
Justice Byron R. White: So that its own accounting would show just the actual cash outlay for taxes and it thus increases its net income, I mean this consolidated return increases its own net income available for dividend as compared with non-consolidated.
Mr. Reuben Goldberg: I hope we're together on this and just to be sure we are may I try to state what my understanding of the situation is.
If we have a regulated company or a company, paying taxes itself on a separate tax return basis, its tax is whatever the taxable income is times the governed corporate rate and that's reflected in its accounts.
Justice Byron R. White: Well, let's assume that's $50,000.00.
Mr. Reuben Goldberg: That would be reflected in its account as federal income taxes and its accounts would probably also show the disbursement of the -- a reduction in cash by $50,000.00.
Now, I'm not sure that I understand the other situation that you were opposing for me.
Is it the same company --
Justice Byron R. White: I'm supposing the actual facts in this case then where there is a consolidated return not a separate return.
Mr. Reuben Goldberg: Well, in the actual facts in this case are that as between the parent and subsidiary, the transfer of cash from the subsidiary to the parent for federal income taxes was at less than the 52% rate.
And actually, I think at a rate of 48 -- an effective rate of 49% whereas the Commission has used in effective rate are reason of its test period of 50.04%.
Justice Byron R. White: So, what would its accounting, its certified public accountant say its tax cost was for the year?
Mr. Reuben Goldberg: At the 49% rate.
I guess my time is, very much, my time is up.
Chief Justice Earl Warren: Very well.
Argument of Thomas Fletcher
Mr. Thomas Fletcher: Mr.Chief Justice, may it please the Court.
Before I present the argument that I would like to present to this Court, I should like to say that the most significant thing to me about the arguments just presented is the complete absence of identification to this Court of the fact that the tax losses are appropriated for United's jurisdictional customers by this device are oil tax losses of an affiliate Union producing company not subject to FPC regulation whose cost and expenses are at no point included in United's taxable income.
That is the jurisdictional sickness which two dissenting commissioners noted and which both the court below and the Tenth Circuit and city service said was the unlawful part of the sort of that required to be set aside.
United Gas Pipeline Company which I shall call United is a natural gas transmission company purchasing, transporting and selling natural gas in intrastate and interstate commerce for resale and also for direct consumption.
United's parent, United Gas Corporation, thereafter coal Corporation owns all of the outstanding stock and long-term indebtedness of its three subsidiaries, United, Union Producing Company and United Overseas Production Corporation which I shall call overseas.
Union is in the business of exploring, developing and operating oil and gas properties.
Overseas operating wholly outside of United States is engaged in oil operations in Africa.
The operations of corporation, United, Union and Overseas are entirely different, separate and distinct and of entirely different nature from the operations of each of the others.
Corporation is not regulated by FPC.
Its distribution business is subject to regulation by state agencies.
United's interstate sales for resale which constitute 44% of its sale is regulated by FPC.
Its intrastate sales to city gates are regulated or subject to regulation by state agencies.
Direct sales to industries generally are not regulated.
Union's interstate sales of gas approximately 50% of its sales are regulated by FPC.
Its sales of oil and intrastate sales of gas are outside of FPC jurisdiction and are not regulated.
Every jurisdictional sale of gas made by United and by Union or add rates in contracts or rate schedules on file with the Federal Power Commission and approved by it.
Overseas is not subject to FPC or any other regulation.
The United group does been qualified filed consolidated federal income tax returns during the FPC representative period of 1957 to 1961 being joined in 1961 by overseas.
In a section for rate review of United, the FPC in computing federal income tax component and United's cost of service instead of applying the statutory corporate rate of 52% to United's taxable income substituted for that rate a lower so-called consolidated effective tax rate of 50.04% not statutory to provide it which results from a computation after utilizing deductions and tax losses arising from operations of United's affiliated companies.
This consolidated effective tax rate is attributable to United's joinder with its affiliates in a consolidated federal income tax return filed by the parent corporation.
This computed consolidated effective tax rate gives United's jurisdictional gas customers the benefit of tax deductions and losses which are not United's but which belong wholly to its affiliates union and overseas and arise solely from their oil operations which are not only not subject to FPC jurisdiction but are none utility operations wholly unrelated to United's operations and not reflected in United's cost of service.
Thus, it's frame the question for decision whether the FPC may utilize such oil tax deductions and losses of United's affiliates to reduce the federal income tax component includable in United's cost of service on which United's rates for sale of gas regulated under the act are based.
The effective consolidated tax rate formula originated in 1963 in the FPC city service decision on review the Tenth Circuit declared that acknowledge jurisdictional limits required an effective separation of activities, profits and losses between regulated and non-regulated businesses in determining the tax allowance includable in cost of service.
Otherwise, it quoted this Court's opinion in Panhandle Eastern versus FPC at 324 U.S., "the profits and losses as the case may be are the unregulated business would be assigned to the regulated business and the Commission would transgress the jurisdictional lines which Congress wrote into the act."
Because the FPC order and its three step allocation violated this principle by taking into account tax losses of non-regulated and unrelated affiliates to calculate the tax allowance includable in the cost of service of the regulated company, the order was set aside, it's unauthorized while that appeal pending, the FPC directed application of its city service formula to United declaring complete factual similarity between the two cases.
In the court below, United asserted the same jurisdictional violation of judge by the Tenth Circuit claiming direct and unequivocal support from that decision.
The Fifth Circuit declared the Tenth Circuit's decision correct and its principles here applicable in controlling and set aside the (Inaudible).
Apart from other compelling reasons, there are two reasons which in my submission require full and speedy affirmance of this judgment.
In the first place, the FPC in its brief at page 15 and at page 10 in this petition footnote 8 concedes the fact that this formula does have effect to appropriate the whole of these unregulated tax losses of the unregulated company and give them to the regulated company.
Thus, it confesses their very jurisdiction of transgression which both the Fifth and Tenth Circuit's judge.
The FPC seeks to retrieve by suggesting its order might be supported by some character of a "sharing of benefits" of the non-jurisdictional tax losses but it is clear that a sharing of these non-regulated, non-jurisdictional tax losses with United's jurisdictional customers would also be unlawful or it would produce the identical jurisdictional transgression for which the court below vacated this order, a jurisdiction violation which the FPC now admits.
Justice Potter Stewart: Mr.Fletcher, I want to make clear what you say the Commission concedes on its brief on page 15.
Mr. Thomas Fletcher: Yes, sir.
Justice Potter Stewart: What language you were referring to?
Mr. Thomas Fletcher: Let me get it for you, Your Honor.
On line 15 -- page 15 line 2, you begin the court below did not criticize the particular formula which as applied to the facts of this case results in "allocating the whole of the savings to the companies that had taxable income."
Then when you go over to the reference in the petition Your Honor, you will see that the language is just plain sidewalk language that identifies "savings" as precisely the same thing as these unregulated tax losses.
Justice Potter Stewart: And then the petition it's note 8, did you say?
Mr. Thomas Fletcher: Footnote --
Justice Potter Stewart: 8 on page 10?
Mr. Thomas Fletcher: Yes sir.
There may be indeed problems in the application of the particular formula used by the Commission in this case a formula which may result in allocating the entire tax saving resulting from losses on unregulated activities to the regulated members of the consolidated group.
In the petition, they used the dubious word "may".
In the brief, they went to the flat word "does".
Justice Potter Stewart: Its parenthetical material that you --
Mr. Thomas Fletcher: Yes sir.
Justice Potter Stewart: -- referred to on page 15 of the brief.
Mr. Thomas Fletcher: Yes.
The FPC exposes this sharing to be specious or declares that the parent's income for the representative period was in excess of $9 million almost three times the aggregate of Union and Overseas non-jurisdictional, unregulated in all of tax deductions and losses of $3.8 million.
The parent put up the capital that produced these tax losses as the sole investor of union it is clearly entitled to all of the benefits of such losses because of the provisions of the tax regulations governing adjustment of the parent's tax cost basis to the extent such tax losses cannot be recouped by Union.
In the second place, the FPC represents to this Court at page 7 of its brief that under its formula any losses sustained by an unregulated company or activity must first be set off against the total income of all unregulated operation.
This, like the formula's first step separate the companies in the regulated and unregulated groups necessary is in the juror -- jurisdiction of context of regulated under the act.
Regulated really can have no other term of reference but in applying its illegal formula, the FPC completely disregarded this, corporation the parent was not subject to it's regulation but it placed corporation wholly in the regulated group and an authorized act.
Though United was only 44% subject to its regulation, the FPC ignored the greater 56%, non-jurisdictional and placed United entirely in the regulated group.
Hardly 50% of Union's business is subject to FPC regulation.
Its intrastate gas business and substantial oil business is unregulated for the representative period its gas business had a taxable income of $507,000.00 while its oil operations resulted in a gross loss of $4.3 million overseas in 1961 had a loss of an excess of $24,000.00.
It is readily apparent that a meaningful and proper separation into regulated and unregulated groups as step one specified would place far greater income to unregulated operations.
56% of United's operations alone would produce an amount far in excess of union and overseas oil tax deduction as noted the parent's taxable income of $9 million all from activities not regulated by the FPC was almost three times the amount of this oil tax loss.
Justice Byron R. White: Well, Mr.Fletcher, excuse me please.
Mr. Thomas Fletcher: Yes.
Justice Byron R. White: Do you suggest that the Commission has incorrectly determined the actual tax cost to the regulated company?
Mr. Thomas Fletcher: I certainly do so.
I say that the Commission was without any power and it was --
Justice Byron R. White: But isn't this question --
Mr. Thomas Fletcher: Yes.
I say that if --
Justice Byron R. White: As a matter of fact, the Commission incorrectly determined what the actual out of pocket tax cost was (Voice Overlap) --
Mr. Thomas Fletcher: 52% of United's taxable income and this record shows that a check for that amount is written.
Justice Byron R. White: To whom?
Mr. Thomas Fletcher: To the Government.
Justice Byron R. White: By whom?
Mr. Thomas Fletcher: By United Gas Pipeline Company.
That's at the page 76 and 77 of volume 1 of the joined appendix.
Justice Byron R. White: Well, --
Mr. Thomas Fletcher: But Mr.Justice -- excuse me sir.
Justice Byron R. White: Do you say that now, is United Gas Line is that the regulated --
Mr. Thomas Fletcher: United is 44% of its regulated, yes by the FPC.
Justice Byron R. White: And is that the one whose rate is involved here?
Mr. Thomas Fletcher: Yes, sir.
Justice Byron R. White: And you say that -- do you say that United actually had a cash out way of 52% for taxes?
Mr. Thomas Fletcher: Yes sir.
And I will go further than that.
I will say that under this record, it could not be treated in any other fashion because the only way, the FPC here undertakes to reduce that is to reach out beyond its jurisdictional power and seize unregulated oil loss.
Justice Byron R. White: I understand your argument.
Mr. Thomas Fletcher: Yes.
Justice Byron R. White: I understand your argument, I'm just wondering as a matter of fact whether the losses which -- was a matter of fact in filing on a consolidated basis saved the regulated company any taxes?
Mr. Thomas Fletcher: Not a single penny.
They're filing on the consolidated basis of course Your Honor produced an amount of tax less than it would have been had all companies filed the separate return, that's a fact.
Justice Byron R. White: Well, --
Mr. Thomas Fletcher: But that was a saving to the parent that was a loss which only the parent could utilize only the parent could prepare the consolidated return, only the parent could offset the losses against the income and it was against consolidated income.
Justice Byron R. White: I understand, now, let's carry it on a little more -- if United, the regulated company had filed separately it would've paid 52% and you say it wrote a check for that amount.
Mr. Thomas Fletcher: Yes.
Justice Byron R. White: To the Government or to the parent?
Mr. Thomas Fletcher: Yes, to the Government in my recollection to that --
Justice Byron R. White: And doesn't the parent pay the consolidated tax itself?
Mr. Thomas Fletcher: Of course, I think so.
I think so.
Now, how they did it actually in that situation --
Justice Byron R. White: I thought mechanically they allocated that from consolidated return purpose --
Mr. Thomas Fletcher: They allocate Mr.Justice as --
Justice Byron R. White: I thought they took the total income and offset it by the losses of the group and the net result has the federal tax rate replied to it --
Mr. Thomas Fletcher: May I --
Justice Byron R. White: And at that amount is then allocated back to the company, is that right?
Mr. Thomas Fletcher: I want to answer that but I have to do it as I understand the situation.
As the regulations require each company in this group did actually prepare a return on a separate return basis and forward to the parent and the parent then combine as the regulations require the -- all of the income and all of the losses and allocated back or rather credited the losses against the income and the resulting income was that on which the consolidated facts was computed.
Now, let me go further because this is part of my understanding of answering your question.
They had to do an allocation as required by Section 1552 not point in a division among themselves but because the Government required that to determine the earnings and profits of each company free from any company transactions and of course that goes again toward the determination of whether or not the tax cost basis is reduced but there was no allocation in the sense of an allocation to determine a pro-rata part of responsibility for the consolidated tax.
Each participant --
Justice Byron R. White: But under the federal tax laws the regulated company in the, assume the out share of taxes.
Mr. Thomas Fletcher: I'm not -- don't believe that that is necessarily correct, Your Honor that could be the case, that is not necessarily so.
Justice Byron R. White: (Inaudible)
Mr. Thomas Fletcher: No sir, I don't think that's right.
I think the regulations require that each member be severally liable for the entire consolidated tax.
Now, of course they can't --
Justice Byron R. White: How could?
Mr. Thomas Fletcher: They can't get to it without doing what the regulations require and that they did no more and no less and in the combination of it of course the parent did take these losses and aggregate them and then apply them to the aggregate of the income.
I believe is that your -- does that answer your question Mr.Justice?
Justice Byron R. White: Yes.
Mr. Thomas Fletcher: Well, maybe I misunderstood it.
Justice Byron R. White: (Inaudible)
Mr. Thomas Fletcher: Well, what I was trying to say was that if the FPC had done what it represents to this Court it must first do all of these losses would have been credited against unregulated income and there would have been nothing left for the Commission to do in computing United's income tax component includable in its cost of service but to use from the jurisdictional business its taxable income time 52%.
Now, from the very earliest days under the act, this Court has held that fundamental rate make rate making principles require separation of regulated and unregulated businesses in order to avoid the very jurisdictional transgression which the court below adjudged.
This is done in Panhandle Eastern versus FPC and Colorado Interstate versus FPC both the 324 U.S.
This principle is wholly consistent with the limited jurisdiction of Section 1 (b) of the Act, in its pipeline rate proceedings which are based on the cost of service method, the FPC determines rates for sales subject to its jurisdiction designed to recoup that cost of service consisting solely of a fair return on facilities used only to make the jurisdictional service and of the cost and expenses incurred only in the course of that jurisdictional service to ensure that this cost of service keeps within the act's jurisdictional bounds.
The FPC habitually and regularly separates out all non-jurisdictional sales and activities and they're accompanying income cost and expenses.
The FPC earlier comprehended applicability of these principles and the tax sale there as set out in its Mississippi River Corporation opinion for FPC 340.
In the city service case, it expressly declared applicability to this tax issue of a necessity to separate the unregulated from the regulated as the Tenth Circuit noted.
But neither in city service nor in this case did the FPC so separate though here it declared the record permitted separation of Union's taxable income between its regulated and unregulated but said this would make no difference because it said Union was in a taxable loss position for the representative period.
But Union's losses were non-regulated and non-jurisdictional losses and not then that tax loss of position does not substitute in my opinion for jurisdiction expressly denied nor did United by joining and filing consolidated return lose its separate entity nor the separate identity of its gas operations nor did Union lose the separate identity of its non-jurisdictional unregulated oil operations.
The tax regulations preserved the separate identity by defining consolidated income on which tax computation is made as a combination of taxable incomes computed separately for the members of the group as I have said each member of the United group for the representative period prepare to return on a separate return basis and deliver it to the parent corporation.
The parent being the only one authorized and so directed by the Code and applicable regulations combined and filed the consolidated tax return.
Of course, as the regulations provide each member is severally liable for the entire tax.
Thus, the parent's combination results in recoupment in that year instead of the eight years permitted by the carry back and carry over provisions.
The FPC took this consolidated tax liability a figure resulting after application of all non-jurisdictional and unregulated losses and divided that between United and corporation in the ratio that their respective taxable income bought to the consolidated income then it related the amount of consolidated tax so assigned to United, to United's taxable income to derive the 50.04%.
Thus, the 50.04% rate is a fiction, a contrive device under which United's jurisdictional customers improperly received the tax benefit of deductions from sources other than United's own operations.
This record indisputably shows the source of these deductions to be 3.8 of Union's net oil losses and the $24,000.00 from overseas.
The FPC's claim that this consolidated tax is a joint cost requiring allocation is in my opinion without cost.
A federal income tax results from application of a prescribed tax rate to a properly determined amount of taxable income.
United's taxable income has its genesis solely in United's own separate business operations as this true of every other member of the United Group.
United's taxable income does not derive in whole or in part from the joint use or operation by United on its affiliates of any facility or property.
The resulting tax liability of each member of United and each member of the group is a direct cost of each.
Allocation is a useful tool for the FPC to use to separate that subject to his jurisdiction from that which is not but allocation serves no function to identity United's taxable income for that arises only from United's operations.
Furthermore, the wisdom of the separation requirement is obvious from Union's operations.This uncontradicted record shows as I have said that Union's gas operations were taxable.
Its oil operations in a loss position but petitioner say that United customers in some fashion never identified contribute to Union's oil cost and hence I would be able to share in these so-called oil tax losses.
But FPC application of this separation principle shows this to be false.
In Union's FPC proceeding, the FPC by an allocation method of relative cost which it declared wholly adequate carefully strained out all possible costs, expenses and income from oil and other non-jurisdictional operations and activities so that there was left a rate based and cost of service restricted solely and alone to jurisdictional gas operations on which Union's jurisdictional rates were determined and approved including those covering its sale of gas to United.
So, Union's FPC approved rates which United pays contains no cost or expenses which give rise to Union's oil tax deductions.
The consequent impact on United and its jurisdictional customers are these forbidden focused on Union's oil situation will surely be rate instability rates rising or falling with Union's oil tax deductions and losses and without respect whatever to the continuation increase or falling of United's cost and expenses over all of these Union matters.
The FPC has no control in which United's customers have no interest and to which they make no contribution.
Petitioner say that the United group constitution in a greater system operated as one company with each member of the group acting as a department and that the parent's consolidated tax constitutes the taxes actually paid under the doctrine of El Paso versus FPC by the Firth Circuit certiorari denied.
But this reliance on El Paso strongly advanced the law as misplaced.
The Fifth Circuit obviously did not agree with petitioners or it did not discuss or cite El Paso.
El Paso on the other hand refutes this claim and is utterly and clearly distinguishable.
First, it had no consolidated effective tax rate issue.
Second, El Paso made no attempt to reduce gas rates through utilization of El Paso's oil department operations.
This is the one corporation when some question was asked by the FPC regulates and they are department but here they made no effort to utilize the oil department losses operations.
Third, the FPC and El Paso capital has separated out all oil and other none utility operations including that tax consequences leaving only jurisdictional gas operations or the tax expense in El Paso reflect its statutory depletion and intangible drilling allowance relating solely and only to natural gas operation.
As I read the El Paso, it's clear that FPC authority over tax deductions is restricted to jurisdiction of gas operations of the regulated company.
But petitioners further argue that the United Group can achieve the benefits from consolidated tax procedure because the regulated monopoly of United guarantees a profitability that will always permit full advantage to absorb Union's tax losses.
Aside from the fact as we shall show that Union can utilize its own tax losses and that the parent corporation either can utilize such tax losses against its own income or to be extent Union does not so utilize with separate reduction of its tax cost basis.
The regulated monopoly and guaranteed profitability concept pointed to 44% of United's jurisdictional business we -- are 44% of its total business we deem to be unsound.
The FPC policy of the lowest reasonable rate which is again been voiced here this morning and this concept of guaranteed profitability are mutually inconsistent.
The concept is further destroyed by Union's ability to take care of its own losses.
It would have a period of eight years, three back and five forward under the carry back, carry forward provisions.This record shows that it can utilize that and use its own tax losses.
Now, this record when this Court gets to it will show if the Court please.
Justice Potter Stewart: Excuse me.
Mr. Thomas Fletcher: That -- pardon me sir.
Justice Potter Stewart: Excuse me.
Mr. Thomas Fletcher: Let me finish this sentence would you please sir?
Justice Potter Stewart: Surely.
Mr. Thomas Fletcher: Would show that this testimony was not cross-examined and it was not disputed from any source.
Justice Potter Stewart: I thought the facts in this record show that of the five-year period take there was only one year and which Union showed any profit at all.
Mr. Thomas Fletcher: I believe that's correct, Your Honor --
Justice Potter Stewart: That was very small --
Mr. Thomas Fletcher: -- 1958.
Justice Potter Stewart: -- $24,000.00 or $25,000.00 or something or --
Mr. Thomas Fletcher: No, sir.
Justice Potter Stewart: Do I have overseas in my?
Mr. Thomas Fletcher: Yes.
Union in 1958 as I recall it, it had any excess of considerably in excess of $4 million taxable income.
Justice Potter Stewart: And the losses average over the four-year period how much a year?
Mr. Thomas Fletcher: Over the five-year-period the net tax loss of Union was $3.8 million.
Justice Potter Stewart: So that on this record, on the facts of this record it's a little hard to be sure you can't do more than speculate as to whether or not Union actually could of taking itself advantage of the carry back and carry forward provision.
Mr. Thomas Fletcher: Well, their witness Your Honor testified that he had had a study made and he had found that they would unquestionably be able to utilize their own tax losses.
Now, what that study was the record don't reflect, he was not cross-examined about it and there was no contrary evidence it was put in to the record.
Justice Potter Stewart: Well, there's no question about it as a matter of law, they're being able to do it if there were profits against wish to take --
Mr. Thomas Fletcher: Yes sir.
I think --
Justice Potter Stewart: That depends upon questions of fact?
Mr. Thomas Fletcher: That's correct sir.
That is correct.
And the record you have correctly stated here what the record show.
Now, at the FPC level to commissioner's dissent in both City Service and United on the ground (Inaudible) that the so-called three step allocation appropriated losses which derived from expenditures in non-jurisdictional business activities finance not by the regulated gas company's customers but rather by stockholders so that it had the effect of regulation by the commission of non-utility enterprises beyond the commission's jurisdiction.
Both the Fifth Circuit in this case below and the Tenth Circuit in City Service found that such three-step formula that the FPC device did appropriate this non-jurisdictional unregulated unrelated tax losses and that that resulted in a violation of the jurisdictional limits which Congress wrote into the act, a transgression already declared by this Court in Panhandle.
In this case, the FPC confesses that the formula does appropriate the whole of those non-jurisdictional unregulated losses.
Thus, it is that the decision below in my opinion is not only right but which it merits affirmance but the FPC confesses that rightness on the specific ground adjudged.
It is accordingly respectfully submitted that the decision below should be in all things affirm and it is so respectfully pray.
I'm grateful to the Court.
Chief Justice Earl Warren: Mr.Brackett.
Argument of William W. Brackett
Mr. William W. Brackett: If the Court please, I'd like to start by referring to a question by Justice White relative to actual taxes in what United the regulated company actually does.
The fact is as Mr.Fletcher summarized that United reports on its separate return which is consolidated then by the parent, a 52% tax liability and does in fact pay a check which is transmitted to the federal government for that 52% liability.
In fact, the reason that this case is here is that the Federal Power Commission objects to the inter-company transaction to the way and which the company files and pays the tax does not believe that this actual tax as we submit it is, is properly applicable to the United, the regulated company here and therefore has attacked in the rate regulation.
I'd like to without too much repetition I hope stress three facts.
Number one, under the Federal Power Commission method here in question it is Union's non-jurisdictional oil losses which cause the reduction in the rates of the jurisdictional portion of United.
Now, this is key to this case.
We do not have a case which it is the gas operations of Union which have losses and therefore the El Paso case which has been referred to is wholly irrelevant here.
It is new fact non-jurisdictional oil losses of Union which are being carried over.
Now, this fact is not disputed.
Staff counsel of the commission level conceded that it was a use of oil losses and that shown in the record, volume 1, page 120.
In fact, it is only oil losses.
There are no gas losses and this is pointed out in exhibit D of United's brief beside the appendix to United's brief which is supported on the record.
And the Commission has conceded in its opinion below in this case is possible to separate the two parts of Union between gas and oil.
And as I've indicated it is the oil losses.
Now, Justice White asked at one point, is it possible for a regulated company to have a loss?
It is of could well have and then in some of these years the gas portion of Union had some losses for tax purposes.
But over all, over the representative five-year period, it did not so we are dealing only with none jurisdictional oil losses.
Secondly, I'd like to make clear that the FPC method used all of the tax reducing results of the losses of Union's oil operations to reduce the rates of the profit companies.
That means the FPC jurisdictional portion of United, the non-jurisdictional portion of United and of the parent company.
There was no sharing of this tax benefit between the loss companies which produced the losses which made the tax reduction and the profit companies.
Number three, the Court of Appeals below and the Court of Appeals in the city service case which the FPC did not attempt to appeal held that there was a jurisdictional violation again there was not a holding that no allocation is possible, there was a holding that the allocation method applied in this case which was all it was before the Court of Appeals was a jurisdictional violation because it took the oil losses and gave all of the benefits to the profit companies including the regulated portion of United.
The Court of Appeals also did not hold that this was a violation because Union, the oil and gas producer was unregulated company or because it was unrelated to United.
They held it's clearly and wholly on the jurisdictional point that oil losses could not be taken across.
Justice Byron R. White: Mr.Brackett, the point you -- Section 1552 says that pursuant to the regulations prescribed by the secretary the earnings and profits of each member of an affiliated group required to be included in the consolidated return shall be allocated and in accordance with one of four different methods available.
Now, anyone could read those sections then it requires that you chose the -- not that you want to allocate the tax liability and if you don't choose why it's by 1552 (a) (1) I gather.
Now, how in this case or was the choice made of allocating the tax liability under Section 1552?
Mr. William W. Brackett: The choice as far as the Section number eludes me but it was done by a method which allocated 52% of the separate company taxable profit of United to United.
Justice Byron R. White: And so that it must -- that is not one of the way that it's expressly listed but so it must have been under four, the tax liability of the group shall be allocated in the court of any other methods selected by the group.
In any event, the actual check to be wrote print to the United States was 52%.
Mr. William W. Brackett: The actual check which united wrote for its --
Justice Byron R. White: Would you concede for the moment that an allocation could have been made consistent with Section 1552 which would have reduced the actual tax cost to United below 52%?
Mr. William W. Brackett: It is my understanding of that Section which I do not consider controlling that the answer of your question is yes.
Justice Byron R. White: I understand, so that the 1552 would've permitted.
Mr. William W. Brackett: It would've permitted it.
Now, if that method which did as you state will set result had been then used for rate purposes.
It's my contention that it would've violated the jurisdictional power of the Federal Power Commission.
Justice Byron R. White: So, it wouldn't make -- you would make the same argument no matter what the method of allocation?
Mr. William W. Brackett: Yes Your Honor, I do not rely on the earnings and profits allocation method on the Internal Revenue Code.
Justice Byron R. White: And would you say that is it permissible for us to think about this case in terms of a single company that has both regulated and unregulated business and they were unregulated business having losses and the regulated business having profit?
Mr. William W. Brackett: It's permissible --
Justice Byron R. White: Is that a decent model with this to --
Mr. William W. Brackett: It is if we refine it a bit.
We have to add certain facts.
Justice Byron R. White: Well, go ahead.
Mr. William W. Brackett: Number one, is the regulated portion regulated by the FPC and I'm sure that you used the term to mean that it is.
Justice Byron R. White: It is.
Mr. William W. Brackett: Now, in that case, then we have essentially a recreation of the El Paso case has been referred to in the Fifth Circuit and in that case, the Fifth Circuit held that the losses could be carried over because it was gas losses which were also subject to the FPC's jurisdiction.
Justice Byron R. White: Well, let's assume the FPC regulated portion is that you say that the unregulated portion is an exploration, the exploration operation and there are intangible drilling costs and its producing operation and there is consequently depletion.
Mr. William W. Brackett: Alight, then the unregulated portion is not subject to the Commission's jurisdiction and in that case I would say that the result should be the same as we urge here.
Justice Byron R. White: Even though, the company predictably would pay no tax at all.
Mr. William W. Brackett: You're saying now -- in other words, you're going again to your point of does the fact of the check control.
Justice Byron R. White: No, I'm saying that if it's all one entity and predictably there are going to be sufficient intangible drilling costs over a period of the years to reduce the tax of this single entity to zero every year predictably and everybody agreed, they'll pay no tax for the next 10 years.
You would say on your argument nevertheless and nevertheless that the rate structure of the company should be set to reflect a tax cost of 52% of the regulated companies or regulated divisions earning.
Mr. William W. Brackett: The answer of your question is yes, because the results of the regulate portion do in fact increase the -- either decrease the refund or increase --
Justice Byron R. White: (Voice Overlap) I think I'm clear enough now what the --
Mr. William W. Brackett: -- or increase the liability by the amount of 52%.
The non-jurisdictional portion should not be brought across.
Justice William J. Brennan: So, the tax saving which I mean you would say the rate should remain high enough to permit a return to the company after a tax cost which the company does not have because of losses in unregulated portion of the business and that the tax saving is -- which is in cash, in cash in hand is available to go on to finance unregulated activity.
Mr. William W. Brackett: The answer is yes because the contrary answer would violate the well-known regulatory principle which I suppose was stated most clearly in Justice Douglas Panhandle opinion that you cannot use non-jurisdictional results to reduce jurisdictional rates.
Now, the converse of this is that the jurisdictional rates are not increased by the fact of losses of the non-jurisdictional companies.
These are kept separate statutorily and regulatory.
Now, the Federal Power Commission --
Justice Byron R. White: (Inaudible)
Mr. William W. Brackett: You mean enter into a consolidated tax return?
Justice Byron R. White: (Inaudible)
Mr. William W. Brackett: To keep them separately completely as you're stating I have take it Justice -- Mr.Justice White.
Justice Byron R. White: (Inaudible)
Mr. William W. Brackett: They are mixed only in a sense Mr.Justice White of having been joined by a cover sheet in the consolidated tax return but the components which produced that net consolidated tax are perfectly clearly computable and are separately cost by the separate operations of the various companies.
Now, FPC in its brief really admits that the Commission aired in its opinion Number 428, Mr.Justice Stewart referred to these admissions and the petition for certiorari at page 10 they stated that there may indeed be problems if the entire savings from the regulated losses are allocated to the profit companies.
And then at page 15 of their brief, they admitted that this in fact occurred that the whole of the losses were taken and applied against the profits of the profit companies in this case, the regulated company, United and the other companies.
This Court really need go no further than this admission.
There was no sharing between profit and loss companies and therefore no party to this case is supporting the FPC decision as it was written.
What the FPC and Memphis are doing are supporting an alternative method which they say the Commission could have used but did not in this case.
Now, the Federal Power Commission --
Chief Justice Earl Warren: We'll recess now.
Mr. William W. Brackett: Thank you, Your Honor.
If the Court please before the noon recess, I think I hope I established that the losses which the Federal Power Commission is taken into effect to reduce the jurisdictional rates of United are losses of the non-jurisdictional activities of the affiliate union and that the Federal Power Commission has admitted the jurisdictional violation that the method which it used in this case and the only method therefore that was before the Court of Appeals that is not before this Court does violate jurisdictional power.
The Commission however, implicitly suggests in its brief that there is some other method which would not violate the Commission's jurisdiction suggests that this method might be by using some of the oil losses allocating others to the loss companies.
Although it's irrelevant and not in this case I'd like to touch on that because analytically it goes to the questions which have been discussed by the other parties.
In the first place, this use of these losses would also be a violation even if there was only a portion of the losses because it crosses the jurisdictional boundaries and the same principles applies, it's not a quantitative principle, it's a question of what is the source of the loss.
Justice Byron R. White: So, just to make it clear, if on a consolidated return there was no consolidated that income and hence no tax to be allocated or paid by anybody and predictably that would be true for future.
You would say that nevertheless the regulated company should be allowed 52% tax credit for making it (Inaudible).
Mr. William W. Brackett: I'd like to answer your question and perhaps the assumption, the answer of your question is yes.
We look to the jurisdictional company and the income and expenses which produces.
I do not understand Mr.Justice White what you mean by predictably.
In this case, we have a corporate system in which United is 44% regulated by the FPC, 56% is not, the parent company is not --
Justice Byron R. White: Well, I can understand you could make an issue on whether or not the FPC correctly concluded that the -- that there would or wouldn't be losses or would or wouldn't be income but that's the factual determination I suppose but let's just assume the you could predict that there was going to be no consolidated net income for the next 10 years and everybody admits to assume everybody agree to that, you would still say that you're entitled to tax.
Mr. William W. Brackett: In those facts which do not pertain here the jurisdictional principle nevertheless cuts across.
Now, in addition to the fact that the Commission's attempt to support a method which was not used here as wrong in principle.
There is also the fact that the Commission has made a second admission and I think Mr.Justice Harlan's question this morning went to that point.
He asked, why did the Commission in its City Service opinion and then again in this United opinion here rejects its own steps proposed method.
Let me state the fact, the fact is that the staff said that these tax losses from non-jurisdictional sources should be spread evenly across the profit companies irrespective or whether they are profit companies are regulated by the FPC or not.
In other words, to the jurisdictional portion of United the same as to the non-jurisdictional portions of any company and therefore that it would be an even spreading.
The Commission rejected this and stated as its principle that you must first offset the none jurisdictional losses against -- I'm sorry, they determined the use was none regulated losses against none regulated income and that only the excess could be carried over against the regulated companies.
Justice John M. Harlan: (Inaudible)
Mr. William W. Brackett: These were the categories of the Commission used, yes Mr.Justice Harlan.
Now, it seems to me that this is a recognition of the boundaries which could be crossed only but instead only a partial recognition so that they only went part way in acceptance of the jurisdictional principles because as I stated previously crossing the jurisdictional line with apportion of the losses is also a violation.
And it seems to me clear that in fact in formulating their regulated non-regulated categories of the companies in such a way as Mr.Justice Harlan has suggested in such a way as to ignore the FPC jurisdiction and to sweep in to the regulated category companies which are regulated by any regulatory agency.
The Commission inevitably set up a method which ignores its own jurisdiction because they lump together as in the regulated category companies which are and companies which are not and portions of companies which are not regulated by the FPC.
It also points up the facts that had the Commission in this case followed the theory which is set forth of offsetting non-regulated losses against rate and non-regulated games.
Had they followed that method but have they utilized the definition of regulated which followed their own jurisdictional limits then the non-regulated losses from the oil operations of union would've been fully used up by offsetting them against the gas operations of union -- I'm sorry, against the non-regulated gas operations of United and non-jurisdictional portion which were sales and intrastate commerce or even more clearly by offsetting them against the parent company's income which again was not subject to the Federal Power Commission jurisdiction.
So, on this basis, the income of the jurisdictional portion of United was not necessary to offset the losses from the non-jurisdictional oil operations.
Therefore, we have two violations and the result of these violations is to produce a number of anomalies and inequities and regulation.
Number one, the jurisdictional customers of United did not pay for the expenses which incurred the losses of union's oil operations.
Federal Power Commission in allocating cost clearly allocates in this case United and union are not even regulated in the same rate cases.
So, there is a separation and yet we have the anomalous situation that when the union suffers losses and therefore the system suffers, United's rates are reduced.
This not only mixes the jurisdictional and the non-jurisdictional impermissibly but also is even reasonable that when one subsidiary loses the other must have lower rates.
The stockholders on the other hand of the company and in this case apparent company do provide the capital and there, the losses which produce the tax benefits in this case.
Now, petitioners make a point of saying that it's the profits from United's gas operations which provide the capital is simply is not correctly analytically when united is a profitable company, it does so on a regulated basis with regulated rates and any funds which are provided to the parent company are dividends and if they stay with the parent company where capital experience and purposes of any company in the system it is simply because the stockholders have waived their right to take them as dividends.
Therefore, very clearly that capital is provided by the stockholders.
They take the risk of the loss company, the only equitably basis would be that they also achieve the tax benefits when the risked companies have losses and therefore produce tax benefits.
This is most clearly I think brought out in this case of a minority stock holder of the loss company.
Let's assume that the loss company in the system has minority stockholders.
Minority stockholders have no of the loss subsidiary, have no influence on the activities of the other affiliates in the system.
They do not produce the situation and which there is regulated profit to offset.
They do not achieve any of the games from the regulated profits and yet under the FPC system the tax benefits are taken away from the loss subsidiary and the parent because they're translated over into rate reductions of regulated company.
Again, this is neither jurisdictionally valid nor good regulatory sense.
I might point out incidentally that when the losses of the loss companies are used in a consolidated basis, the parent's basis for tax purposes games or losses is reduced, the basis in the subsidiary.Therefore, these losses suffered whether their real losses as petitioners like to refer to it or tax deductible losses of Mr.Justice White pointed out very clearly and tangibles are quite real.
In any case, these -- the basis on the subsidiary is reduced and therefore there's a real tangible loss produced by the losses.
There is also a discrimination against companies which have a regulated affiliate produced by the FPC method.
A oil company cannot explore and compete on an even basis when another oil company if the former company has a regulated affiliate because it knows that its tax cushion, the tax offset which Congress granted it when it has losses will be taken away in the form of lower rates to the affiliate.
Therefore, there's a discrimination against the risk company which has a regulated affiliate.
And it seems to me that this is clearly a frustration of the congressional intent in the passage of the consolidated tax provisions which were to treat multi-corporate systems on the same basis single cost to company systems.
In this case, the incentive to take risk is destroyed by the fact of consolidated tax benefits are translated into rate reductions of the regulated company.
I'd finally like to point out that reversal of the FPC decision in other words, the affirmance of the Court of Appeals decision by this Court does not have the effect of raising FPC rates beyond their normal level.
It simply leaves the rates if the level that they have historically been and it does not reduce them instead it allows the tax offsets granted by Congress to the parent company to remain with the parent company, the parent company with stockholders being those who bear the loss of the risk of the loss operations.
The FPC's basic premise is that we are dealing here with the joint cost and I submit that we are not dealing with the joint cost, we are dealing with consolidated tax liability which is separately incurred.
It is nothing more than the sum of the allocate parts and the portion of the consolidated tax which is produced by the regulated company is the sum of its own income and its own expenses similarly the tax saving that's referred to into this case is produced by the losses suffered by the non-jurisdictional operations of the oil company and this is also separately traceable.
The general principle is that if you can assign the results of a regulatory act you do not allocate and this case it's quite clear that you can trace the cost of the losses, the non-jurisdictional operations and therefore, there is no necessity to allocate the tax.
The basic claims of the petitioners are practical arguments that there is a close relationship between the operations of the union and United.
What they fell to point out is that almost everyone of their claims some of them are factually inaccurate but even assuming arguendo that they were accurate almost all of their claims go the gas operations of union and that is not the operation which has the loss.
It is the oil operations and they are not closely related in any way even if related this way relevant factor.
Basic summary of this case then is I think that all parties agree that the method used by the Federal Power Commission in this case is in error.
The concessions of the FPC brief make that clear.
Therefore, we are dealing with the question of whether this Court should reverse Court of Appeal reinstate the Federal Power Commission decision which is not supported by either the Commission or the respondents.
Second step would be if we were to go beyond that point whether or not the Federal Power Commission could in some other case shape a jurisdictionally valid system.
I submit that I've shown that they could not.
If the Court reaches that question then we must deal with the jurisdictional violations but that is not the decision of the FPC in this case.
I thank the Court.
Chief Justice Earl Warren: Where is the concession that you spoke of which would bring all parties into agreement on the fact that this is the -- that Commission was in there.
Mr. William W. Brackett: The concession which I deal with Mr.Chief Justice is at page 10 of the petition for certiorari of the Federal Power Commission and at page 15 of the brief of the Federal Power Commission in which the Commission states that there are indeed problems jurisdictional problems with a system which allocates the entire loss of benefits to the profit companies rather than splitting them sharing as they say between the profit loss companies.
Chief Justice Earl Warren: That's the language of Mr.Fletcher quoted in --
Mr. William W. Brackett: I believe Mr.Fletcher quoted it in Mr.Justice Harlan referred to it (Voice Overlap).
One final point, I find that I reminded by Mr.Fletcher and yes, we're both reminded by her associates that I made a misstatement with regard to the -- an allocations under 1552 (a) which as I stated were irrelevant but used only for purposes of earnings and profits.
The method used is not invariably assigned 52% of the tax to United and the tax payment follows the 1552 method so that in some years it's 52% and some that is not for the five-year period in question I find it was 49%.
I was not informed at the time and I apologize to the Court for the statement.
Chief Justice Earl Warren: Very well.
Rebuttal of Howard E. Wahrenbrock
Mr. Howard E. Wahrenbrock: In the few minutes that I have, I think I can make two points that maybe of some assistance (Voice Overlap) --
Justice Hugo L. Black: Are you going to thing to think about concession, is that you made?
Mr. Howard E. Wahrenbrock: I haven't felt that more was called for but it runs I may say to so far as the so-called concession in the petition for certiorari runs to the possibility which I think is faced in every case in which an allocation has to be made that the application of that allocation of that method of allocation in new cases as cases come along may present problems.
Justice Hugo L. Black: (Inaudible)
Mr. Howard E. Wahrenbrock: No.
In this case, there is no question as to the method of allocation before the Court but only as to the power to make an allocation and the method of allocation that some of the methods, some of those problems it's easy to speculate may arise but before the court below and before the -- and the Tenth Circuit there was no decision, no criticism of the Commission's method of allocation.
Many of the statements that are questioned about the Commission's method of allocation ran to division between regulated and non-regulated business.
That wasn't passed on by the court below, wasn't passed on in the Tenth Circuit.
What was said was what was held was the Commission does not have power to allocate a portion of the consolidated return tax reduction to among the taxable income companies so that the regulated company gets a share of that.
Justice Byron R. White: Well, what does this mean that if you would've prevailed on the question of power which has to provide for consideration of the matter?
Mr. Howard E. Wahrenbrock: It had the consideration of the method.
There has been no decision on that.
Justice Byron R. White: But is it a question of (Voice Overlap) --
Mr. Howard E. Wahrenbrock: We would -- I would question whether that question was preserved in -- so that it could be, so that review could be sought of it.
Natural Gas Pipeline came the closest to preserving the question.
But Natural Gas Pipeline's only interest is that of a customer and as it says in its brief its interest is in reducing rates.
And this is a reduction that it's attacking and under this Court's decision, Justice Harlan's opinion in the Phillips case, the second Phillips case holding that suggesting that Wisconsin could not object to the spiral escalation clauses because Wisconsin did not -- it was other way around, California could not object to the spiral escalation clauses because they affected only Wisconsin if California was not agreed.
Though we say natural has not agreed then natural's reservation of a question would be (Inaudible).
In other words, there may be questions on remand of the court below whether anybody can raise this question at all if certainly it wasn't passed on.
Justice Byron R. White: In any event, we don't have some of that year assuming that you (Voice Overlap).
Mr. Howard E. Wahrenbrock: Right.
Now, this suggestion of -- well, I was going to point out on the 49% versus the 52% but Mr.Justice White had asked about our brief on page 25 at note 26 gives the record references and on the percentage that was actually allocated by United for tax purposes, if Your Honor please, and the method of allocation is explained on page -- on the joint appendix page 33 and 34.
The method of allocation is described.
Justice Byron R. White: And that this, what you're talking about is the amount of tax actually paid.
Mr. Howard E. Wahrenbrock: It's the amount that they among themselves --
Justice Byron R. White: (Voice Overlap)
Mr. Howard E. Wahrenbrock: -- allocate for the tax purpose of determining whether they are operating at a profit or a loss, profits and earnings for tax purposes.
Justice Byron R. White: Yes, but who paid the tax?
Mr. Howard E. Wahrenbrock: The tax, there is only a single tax paid and that's the problem that recalls for the allocation with --
Justice Byron R. White: But whose check was it?
Mr. Howard E. Wahrenbrock: I'm sorry?
Justice Byron R. White: Whose check did the government get?
Mr. Howard E. Wahrenbrock: The record citation that was given for that does not disclose who wrote the check.
It does say that this company wrote a check for the amount that was allocated to it by this method that I have given you the citation for.
Justice Byron R. White: Wrote the check to whom?
Mr. Howard E. Wahrenbrock: It says that the check was written to the government but that couldn't be a check for the payment of the total tax because of (Voice Overlap) --
Justice Byron R. White: It's not a total tax but why wouldn't each company write a check for each year of the tax?
Mr. Howard E. Wahrenbrock: Because there is a single tax liability for which the parent corporation is responsible for filing a return and seeing that it is paid.
Now, I suppose it can handle two checks of five checks or 10.
Justice Byron R. White: Well, could you explain this to me?
Section 1552 permit an allocation of tax liability back to the companies in anyone of several way --
Mr. Howard E. Wahrenbrock: Yes.
Justice Byron R. White: -- and with the consent of the secretary --
Mr. Howard E. Wahrenbrock: That's for tax purposes for determining that's what 1552 is talking about.
Justice Byron R. White: Well, I'll just say for purpose of 1552.
Mr. Howard E. Wahrenbrock: Yes.
Justice Byron R. White: It allows the allocation back to the companies of tax liability and one of the ways in which it could allocated is to allocate back to this regulated company, here is 52%.
Mr. Howard E. Wahrenbrock: But that is not the method that they did follow.
Justice Byron R. White: Just wait --
Mr. Howard E. Wahrenbrock: Alright.
Justice Byron R. White: Let's assume for the moment that that is precisely what the company's did they allocated back to United the regulated company 52%.
Mr. Howard E. Wahrenbrock: Yes.
Justice Byron R. White: And that the United out of pocket cost for taxes regularly and consistently is 52% of its net income although 1552 would permit a different allocates.
Mr. Howard E. Wahrenbrock: Yes, I understand your question and I think --
Justice Byron R. White: Now, what business of the FPC got and say that what to repeal this part of 1552?
Mr. Howard E. Wahrenbrock: Yes.
The answer grows out of such a long history of the Federal Power Commission's no profits to affiliates rule that I had not realized that was involved.
These -- such a payment represents an adjustment among --
Justice Byron R. White: (Voice Overlap) answering -- just answer against his background, 1552 -- 1501 doesn't require consolidated parent.
Mr. Howard E. Wahrenbrock: That's right.
Justice Byron R. White: Now, these companies could've returned their income separately.
Mr. Howard E. Wahrenbrock: Yes.
Justice Byron R. White: And united would've paid 52% of its net income and tax.
Mr. Howard E. Wahrenbrock: Yes.
Justice Byron R. White: And the Federal Power Commission would have recognized and a tax allowance is 52% even though a consolidated return was permissible.
Mr. Howard E. Wahrenbrock: Possibly but I'd like to put it --
Justice Byron R. White: Possibly enough, let's get to --
Mr. Howard E. Wahrenbrock: I'd like to give you the caveat on that.
Justice Byron R. White: Let's get back straight.
Mr. Howard E. Wahrenbrock: Possibly, if the Commission could find upon the facts which on review were found sufficient to support its finding that as a matter of prudent management the affiliated group should have saved the utility taxes by filing a consolidated return then the Commission might find that they had not acted prudently and in incurring the 52% tax loss.
Now, this is purely hypothetical but I want to explain my caveat in answering you.
Justice Byron R. White: So, you would say -- what you would say the commission in a -- would have power to require either the filing of consolidated return or a result equivalent to a consolidated?
Mr. Howard E. Wahrenbrock: Yes, sir.
Justice Byron R. White: And that if a consolidated return is filed, the Commission has the power to select the method of allocating tax liability even though it restricts the choices open under 1552?
Mr. Howard E. Wahrenbrock: I would like to answer yes and qualify it immediately by saying it would not have that effect because what the Commission allows in determining cost of service is not controlling on what the companies may do for their other purposes.
Now, we are dealing here with one of an affiliated group of corporations and the Commission will not allow one company that is a member of such a group to pay as a tax, a payment of 52% when as a matter of fact the group does not incur a liability.
52% of which is properly allocable to the regulated company.
An affiliated group cannot by virtue of their 100% affiliation settle the regulated company with more cost than the group is actually incurring upon behalf of that company.
Justice Byron R. White: Well, that's your position.
Mr. Howard E. Wahrenbrock: Yes.