Law School Case Brief
Commissioner v. Idaho Power Co. - 418 U.S. 1, 94 S. Ct. 2757 (1974)
Accepted accounting practice and established tax principles require the capitalization of the cost of acquiring a capital asset. Costs incurred in the acquisition of a capital asset are to be treated as capital expenditures. This principle has obvious application to the acquisition of a capital asset by purchase, but it applies, as well, to the costs incurred in a taxpayer's construction of capital facilities.
On its books, following agency-prescribed accounting methods, respondent utility capitalized over years the depreciable operating and maintenance costs of transportation equipment used in constructing its capital facilities. For income tax purposes, that depreciation increment was claimed as a current expense deduction under 26 U.S.C.S. § 167(a). The deduction was disallowed by petitioner Commissioner of Internal Revenue, but on appeal, the United States Court of Appeals for the Ninth Circuit upheld the deduction from gross income for depreciation on transportation equipment respondent owned and used in the construction of its own capital facilities pursuant to 26 U.S.C.S. § 167. The appellate court held that depreciation was not an "amount paid out" as that term was used in the capitalization provisions of 26 U.S.C.S. § 263. The Commissioner sought further appellate review.
Was the taxpayer utility entitled to the deduction from gross income for depreciation on transportation equipment that the utility owned and used in the construction of its own capital facilitiesunder 167(a) of the 1954 Internal Revenue Code (26 USCS 167(a)?
The United States Supreme Court found that depreciation reflected the cost of an existing capital asset, not the cost of a potential replacement of the asset, and that equipment depreciation allocable to the capital asset had to be capitalized. The Court noted that respondent was treating its construction-related depreciation as part of the capital assets on its books. This method maintained tax parity with a business whose capital improvements were done by an independent contractor and comported with regulatory accounting methods. This was also in line with respondent's tax treatment of materials, other equipment, and wages related to the capital asset.
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