*121 Decision will be entered under Rule 50.
Petitioner's basis for depreciation on water mains and curb connections, held, reduced to the extent that the costs therefor are defrayed by unrefunded consumers' deposits, notwithstanding that a portion of such deposits may still, to some unascertainable extent, be subject to refundment. Detroit Edison Co. v. Commissioner (C. C. A., 6th Cir.), 131 Fed. (2d) 619, affd., 319 U.S. 98">319 U.S. 98, followed.
*406 Respondent determined deficiencies in income tax for the years 1940, 1941, and 1942 in the respective amounts of $ 7,343.48, $ 2,453.89, and $ 6,003.80. Only part of the determined deficiencies is in question.
The sole issue*122 is whether respondent erred in disallowing deductions for depreciation in the respective amounts of $ 4,315.40, $ 4,170.89, and $ 5,042.79 for the taxable years involved.
Substantially all of the facts have been stipulated.
FINDINGS OF FACT.
The stipulated facts are hereby found accordingly.
Petitioner is a New Jersey corporation and since its organization has engaged in the business of supplying water. Incident to its business, it operates pumping stations, constructs water mains and necessary extensions, and services its facilities in order to insure adequate supplies of water to its customers.
As part of its regular business, petitioner receives deposits of two types: (1) deposits for main extensions; (2) deposits for connections to curb. In the taxable year 1942 there was also a deposit under a special contract between the United States Government and petitioner to cover the construction of water mains for the purpose of supplying water to an Army camp in New Jersey.
Deposits for extensions of water mains are paid by persons desiring an extension of a distribution or transmission main. Such deposits are received under a standard form of agreement, which provides in part as *123 follows:
*407 * * * provided, however, that after a period of ten years from the above date, all deposits not then returned to the applicant or his assigns shall be the property of the Water Company. * * *
The rules and regulations of the Board of Public Utility Commissioners of New Jersey provide that when applications for extension are requested by land development agencies "the utility may require a deposit from the applicant covering the entire cost of installing the necessary main lines to serve the tract"; that such deposits shall not carry interest; that they "are to be returned to the depositor when and as new houses abutting on such main lines are completed, the prospective consumer's equipment * * * installed, the house occupied by a bona fide owner or responsible tenant who has entered into a contract for use of the utility's service"; that "Upon such completion and occupation there shall be returned to the depositor an amount equal to the estimated charge for * * * three and one-half years' service for a water extension; provided, however, that no part of the deposit remaining over ten years is to be returned."
The commissioners' rules further provide that, upon *124 application of individual permanent residents for extension, estimates shall be made of the costs of making the particular extension and of the anticipated normal revenue to be derived therefrom. Where the cost for the extension does not exceed three and one-half times the estimated normal annual charge for service at regular rates, including in the estimate the amount to be received from the municipality for fire protection, the utility is required to make the necessary extension upon receiving from the applicant the properly signed standard form of application, which is for an indefinite period, not less, however, than the number of years necessary to produce at normal annual charge the cost of the extension.
Two special plans are established to cover the situation where the cost of making an extension exceeds the amount at which the utility must install without special guarantee. Plan A provides:
The excess cost of the extension, as defined above, shall be deposited with the utility and remain, without interest, in the possession of the utility until such time as the revenue from the particular extension is sufficient, in accordance with the rule above, when it shall be returned*125 pro rata to the depositor, providing, however, that after a period of ten years, all deposits not then returned to the applicants shall remain the property of the utility and all transactions shall be treated in accordance with the standard classification of accounts.
Plan B provides that the applicant shall guarantee the utility a monthly revenue equivalent to one forty-second of the total cost of the extension, but that the utility is not required to accept a guarantee of more than 50 per cent above the normal charge for service to the particular applicant.
From 1937 through 1945 petitioner made refunds to depositors for *408 main extensions after the expiration of 10 years from the date of installation in the total sum of $ 18,291.15. The amounts so refunded are not specifically labeled in petitioner's reports to the state commissioners as being refunds after the expiration of the 10-year period.
Deposits for connections from main to curb are paid by property owners or municipalities to cover the cost of installation of a service pipe from the distribution or transmission main to the curb when the service line is not to be used immediately. Refunds of such deposits are made*126 whenever regular service is begun or when the meter is installed or in use.
In the case of deposits for connections to curb, no period of limitation as to refund is provided either in the agreement or in the rules of the Board of Public Utility Commissioners.
Approximately 95 per cent of these curb deposits are made by municipalities. Pursuant to statutory authority (N. J. S. A., secs. 40: 67-11, 12), a municipality may order property owners to install connections to curb prior to paving or improving a street. Upon the failure of the property owner to install such connections, the municipality orders petitioner to install them, the municipality in turn paying petitioner the cost of such connections. Such cost is then assessed against the property owner.
The orders of the Board of Public Utility Commissioners implement the statute, and provide in part:
Whenever a tap is made through which regular service is not immediately desired, the applicant shall bear the entire expense of tapping the main, laying and maintaining the service pipes, couplings and connections, but shall be entitled to a refund for such part as the utility is hereinbefore required to assume, whenever regular service*127 is begun.
The notice of assessment of the municipality bears a notation that when service is commenced such cost will be refunded by the utility to the owner of the property against which the assessment was or should have been made.
On March 12, 1942, petitioner entered into a written contract with the United States Government to supply water service, including construction of connection facilities, to the Stelton Staging Area, Piscataway Township, New Jersey. The contract provided, in part:
Article II -- Payment for Cost of Facilities
1. In consideration of the investment to be made by the Contractor and the uncertain duration of the operation of the Stelton Staging Area, the Government agrees to pay the Contractor, as a connection charge, the estimated cost, less estimated salvage value of the facilities to be provided by the Contractor under this contract within thirty (30) days after receipt of satisfactory evidence of completion of the facilities. It is estimated that the facilities to be constructed under this contract will cost $ 170,050.00. The agreed net salvage value to be deducted is $ 43,450.00. The net connection charge to be paid by the Government *409 shall*128 be $ 126,600.00. The Government is to receive a refund of the amount so paid as hereinafter provided.
Provisions for refund of the deposit were as follows:
Article IV -- Refund Agreement
1. In consideration of the fact that the Contractor is to be reimbursed for the estimated cost of the facilities to be provided hereunder less the estimated net salvage value thereof, and the further consideration that title to said facilities is to be and remain in the Contractor, it agrees to allow the Government on each monthly bill for water service supplied as hereinafter provided for, a credit of thirty-three and one-third percent (33 1/3%) of the gross amount of such bills as rendered, said credits to be made monthly and continue until such time as the accumulated credits amount to $ 100,850.00 and sixteen and two-thirds percent (16 2/3%) of the amount of such bills thereafter until the whole amount of the net connection charge of $ 126,600.00 has been paid, unless this contract shall have been previously terminated, except that if a new contract for the supply of water service shall be entered into between the parties hereto within a period of fifteen months from the date of such failure *129 to renew, the deductions shall resume and continue as above provided.
By supplemental agreement of August 20, 1942, the cost of the facilities was revised to $ 117,188.37. This amount was left on deposit by the United States Government to cover cost, less salvage value, of laying the necessary transmission main.
Petitioner has been taking into its income account the water sold pursuant to this contract at $ 90 a million gallons and crediting the amount pursuant to the provisions of article IV against the sum of $ 117,188.37. During the taxable year 1942 there was credited against this deposit the sum of $ 8,228.34, leaving an unrefunded balance of $ 108,960.03. During the year 1943, there was credited against the deposit the sum of $ 17,152.98; during the year 1944, the sum of $ 20,404.35.
The New Jersey Board of "Public Utility Commissioners' Uniform System of Accounts for Water Utilities" (first revised issue -- effective January 1, 1925) provided, inter alia:
| Account No. | Consumers' Deposits |
| 204 | Credit to this account all cash deposited with the utility by |
| consumers as security for the payment of water bills. | |
| 212 | Contributions for Extensions |
| This account shall include such portion of the cost of extending | |
| the utility's water system as is borne by its consumers or others, | |
| which it is not ultimately to repay to them. This covers grants | |
| from governmental bodies, or contributions from chambers of | |
| commerce and similar organizations, as well as from individual | |
| consumers, made with the object of establishing a new service | |
| in the community, by assuming part of the investment cost of | |
| the enterprise. | |
| 219 | Other Unadjusted Credits |
| This account shall include the amount of credit balances in | |
| suspense accounts that cannot be entirely cleared and disposed | |
| of until additional information is received. |
*130 *410 When deposits are made, petitioner debits its cash account and credits a liability account entitled "Consumers' Deposits." Upon completion of the extension of connection for which the deposit was made, the amount of that expense is added to the plant property account. When the property item is entered in the capital account, no deduction is made on account of the consumer's deposit.
Since 1923 deposits received have been included on its books under the heading "Consumers' Deposits." Since 1927, in petitioner's reports made to the State Public Utility Commissioners, such deposits have been included in the account designated "Account 219 -- Other Unadjusted Credits."
A footnote on the balance sheet, a part of such reports, contains the following instruction of the Board of Public Utility Commissioners:
Credit to account "Other Unadjusted Credits" advances for the "Construction of Extensions" which are ultimately to be repaid, wholly or in part to the consumer. When final determination has been made as to the amount of the advances to be returned to the consumer, the balance, if any, shall be credited to account "Contributions for Extensions."
Included in the account "Other*131 Unadjusted Credits" for the years 1940, 1941, and 1942 are consumers' deposits for extensions to mains which were made more than ten years from the date of the installation of the extension.
No entries were made in "Account 212 -- Contributions for Extensions" in petitioner's reports from 1927 through the taxable year 1942.
On December 15, 1945, there was an amount of $ 700 in account 212, received from the War Department for providing water service to the Acess Road at the industrial surplus storage depot, Linden, New Jersey. This entry was made because the War Department was not entitled to any refund and the amount constituted a contribution.
From 1917 to 1922, inclusive, petitioner's balance sheets submitted in connection with its Federal income tax returns included, under "Accounts Payable," the amount of deposits received. From 1923 through the taxable year 1942 such deposits were included in a liability account under the heading "Consumers' Deposits."
The following constitutes an analysis of deposits by classes carried on petitioner's books at the close of the years 1939 to 1942, inclusive:
| Deposits for main extensions | 12/31/39 | 12/31/40 | 12/31/41 | 12/31/42 |
| Standard agreement | ||||
| (under 10 yrs. old) | $ 13,462.17 | $ 10,554.37 | $ 7,690.28 | $ 7,049.88 |
| Standard agreement | ||||
| (over 10 yrs. old) | 110,254.71 | 107,242.63 | 101,366.05 | 102,230.37 |
| Special agreement (U. S. Govt.) | 108,960.02 | |||
| Total | 123,716.88 | 117,797.00 | 109,056.33 | 218,240.27 |
| Deposits for connections to curb | 126,460.89 | 125,213.28 | 124,606.29 | 124,416.48 |
| Grand total | 250,177.77 | 243,010.28 | 233,662.62 | 342,656.75 |
*132 *411 From January 1, 1932, to January 1, 1945, the balance of curb deposits never exceeded $ 124,000 and never went below $ 120,000. The balance on January 1, 1932, was $ 121,681.27; on January 1, 1945, $ 121,429.77.
The following tabulation shows the base used by petitioner in each year, depreciation, respondent's reduction of base, and disallowance of depreciation:
| Depreciable | Depreciation | Depreciation | ||
| Year | base | deducted | Base reduced | disallowed |
| 1940 | $ 4,677,328.39 | $ 81,853.25 | $ 246,594.02 | $ 4,315.40 |
| 1941 | 4,810,807.46 | 84,189.13 | 238,336.45 | 4,170.89 |
| 1942 | 5,002,806.24 | 87,549.11 | 288,159.68 | 5,042.79 |
The disallowed portion of the base in each year represents the mean of unrefunded deposits between the beginning and close of each taxable year, and the disallowed portions are further divided as follows into deposits for main extensions and curb connections:
| Year | Main | Curb | Total |
| 1940 | $ 120,756.94 | $ 125,837.08 | $ 246,594.02 |
| 1941 | 113,426.66 | 124,909.79 | 238,336.45 |
| 1942 | * 163,648.30 | 124,511.38 | 288,159.68 |
OPINION.
Were it not for a single aspect, this proceeding*133 would be identical in principle with Detroit Edison Co. v. Commissioner, 319 U.S. 98">319 U.S. 98, and would similarly call for disallowance of the depreciation deducted by petitioner on extensions and connections paid for by its customers. The controversy here, which was not reached in the Supreme Court's discussion of the Detroit Edison case, covers the extent to which petitioner's obligation to refund the payments in question to its customers avoids the rule of that case.
It might appear on superficial inspection that two classes of payments are involved -- those which petitioner could no longer be compelled to return, and those which would still be returnable upon the specified conditions. Since, however, the view we take of the matter is otherwise, the two classes of payments will be dealt with together.
In our estimation, the present situation can not in any respect be adequately removed from the scope of the Detroit Edison principle. The sums in question, whatever the condition of their repayment, were delivered to petitioner and used by it to construct the capital *412 assets in question. To that extent they diminished the investment *134 which petitioner, out of its own capital, incorporated in the improvements -- in other words, its own cost under the rule of Detroit Edison Co. v. Commissioner. When, if ever, the sums were repaid, for whatever reason, petitioner's investment would come into existence, but not until then. See Reisinger v. Commissioner (C. C. A., 2d Cir.), 144 Fed. (2d) 475. Even though it kept its accounts on the accrual basis, the obligation to repay was at all times too speculative to constitute an accruable liability.
To quote from the opinion of the Sixth Circuit Court of Appeals in the Detroit Edison case (131 Fed. (2d) 619, 622):
As the facts appear in the record, the refunds which petitioner had contracted 1 to make to its customers who had contributed the cost of the erection of the facilities were too indefinite in amount and time of payment to be capitalized as representative of their cost to the petitioner at the time such depreciable assets were constructed. There could then be no reasonable prediction as to the amount petitioner would ultimately refund. It is essential to the creation of an accruable liability*135 or reserve that there be an agreement between the parties fixing the amount or that the amount due be determinable with reasonable certainty from the surrounding facts and circumstances. When the obligation is contingent, or indefinite as to amount, its accrual or payment is so uncertain that no charge can be made under any correct system of accounting. * * * [Citing cases.]
As we have suggested, this eliminates the need for considering separately the payments as to which the ten-year period of limitation of all liability has already run. Even as to these, petitioner occasionally grants refunds, and respondent concedes that when this occurs, the amount constitutes a proper addition to basis. 2 Still less is it required that we eliminate the payments for connections to curb as being repayable indefinitely. When*136 repaid they constitute cost, not before. The entire situation can thus adequately be dealt with by regarding petitioner's cost as diminished by the total contributions of its customers, less, however, the aggregate of amounts previously returned by it at any given time. The depreciation deductions should be computed accordingly.
Decision will be entered under Rule 50.
Footnotes
*. Includes deposit on U. S. Government contract made in March 1942.↩
1. The present petitioner concedes that in two out of the four classes of contracts described by the Circuit Court in the Detroit Edison↩ case, some provision for refund under certain conditions existed.
2. "* * * It is to be noted, however, that the respondent does not say that the petitioner may not depreciate the sums voluntarily refunded because there was no legal obligation so to do; he merely states that until the refund is made there is no outlay by petitioner, nothing to depreciate."↩