Commissioner v. Idaho Power Co.

418 U.S. 1 (1974)

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Nature of the Case

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Facts

P is a Maine corporation organized in 1915, with its principal place of business at Boise, Idaho. It is a public utility engaged in the production, transmission, distribution, and sale of electric energy. P keeps its books and files its federal income tax returns on the calendar year accrual basis. P has used its own equipment and employees in the construction of improvements and additions to its capital facilities. During 1962 and 1963, the tax years in question, P owned and used in its business a wide variety of automotive transportation equipment, including passenger cars, trucks of all descriptions, power-operated equipment, and trailers. The transportation equipment was used in part for operation and maintenance and in part for the construction of capital facilities having a useful life of more than one year. To the extent the equipment was used in construction, the taxpayer charged depreciation of the equipment, as well as all operating and maintenance costs (other than pension contributions and social security and motor vehicle taxes) to the capital assets so constructed. P treated the depreciation on transportation equipment differently. It claimed as a deduction from gross income all the year's depreciation on such equipment, including that portion attributable to its use in constructing capital facilities. On its books, in accordance with Federal Power Commission-Idaho Public Utilities Commission prescribed methods, P capitalized the construction-related depreciation, but for income tax purposes that depreciation increment was claimed as a deduction under §167 (a). D disallowed the deduction for the construction-related depreciation. D ruled that that depreciation was a nondeductible capital expenditure to which §263 (a)(1) had application. (P’s method had full depreciation in 10 years, and D’s method had full depreciation in 30 years). P sued. The Tax Court agreed with D in that equipment so used should be capitalized and recovered over the useful life of the assets constructed. The Court of Appeals concluded that a deduction expressly enumerated in the Code, such as that for depreciation, may properly be taken and that 'no exception is made should it relate to a capital item.' The Supreme Court granted certiorari. P asserts that its transportation equipment is used in its 'trade or business' and that depreciation thereon is therefore deductible under §167 (a)(1) of the Code. The Commissioner concedes that §167 may be said to have a literal application to depreciation on equipment used in capital construction, but contends that the provision must be read in light of §263 (a)(1) which specifically disallows any deduction for an amount 'paid out for new buildings or permanent improvements or betterments.' D argues that §263 takes precedence over §167.