APPEAL from the Circuit Court of Fayette County; the Hon.
RAYMOND O. HORN, Judge, presiding.
MR. JUSTICE GEORGE J. MORAN DELIVERED THE OPINION OF THE COURT:
Rehearing denied September 2, 1977.
This is an appeal from an order of the circuit court of Fayette County reversing an order of the Illinois Commerce Commission fixing rates for the Monarch Gas Company.
On November 21, 1974, Monarch Gas Company filed proposed tariff revisions for its general service area which would increase revenue by approximately $58,000 per year. Pursuant to statutory authority, the Illinois Commerce Commission suspended the increase until April 20, 1975, and later extended the suspension until September 25, 1975. On September 25, 1975, the Commission entered its order granting a portion of the proposed tariff increase. The increase raised the rate of return on Monarch's original investment minus depreciation to 8.75%.
The Commission found that in 1970 Monarch had elected, pursuant to Subchapter S of the Internal Revenue Code (26 U.S.C. § 1371 et seq.) to be taxed through its stockholders on the taxable income of the corporation, in lieu of paying the corporate tax. As Monarch itself paid no income tax, the Commission rejected the inclusion of the amount the corporation would have paid in computing the operational expenses. Pursuant to section 68 of the Public Utilities Act (Ill. Rev. Stat. 1975, ch. 111 2/3, par. 72), this portion of the Commission's order was appealed to the circuit court. The Commission now appeals from the reversal of its order by the Circuit Court.
In this appeal the Commission notes that judicial review of its orders is limited by statute, and contends that the evidence fully supports its order. Monarch contends that the rejection of income tax expenditures frustrates the purpose of the tax code and is thereby unlawful. Monarch also urges that the failure to include income tax expenditures as an operating expense lowers the rate of return to 6.19%, below the 8.75% rate the Commission allowed. Finally, Monarch argues that the Commission is estopped from rejecting its claimed expense by its failure to object to the income tax expenses in the annual report by Monarch to the Commission following its Subchapter S election in 1970.
• 1 The authority to review and the scope of review of Illinois Commerce Commission orders derives from section 68 of the Public Utilities Act (Ill. Rev. Stat., ch. 111 2/3, par. 72). The findings and conclusions of the Commission are held to be prima facie true and will not be set aside unless against the manifest weight of the evidence. In review, the courts> are limited to a determination of (1) whether the Commission acted within the scope of its authority, (2) whether it made findings in support of its decision, (3) whether the findings have substantial support in the record, and (4) whether constitutional rights have been violated. (Illinois Bell Telephone Co. v. Illinois Commerce Com., 55 Ill.2d 461, 469, 303 N.E.2d 364, 369; Sunset Trails Water Co. v. Illinois Commerce Com., 7 Ill. App.3d 449, 456, 287 N.E.2d 736, 740.) An order of the Commission is presumed to be valid, and will not be set aside unless it is against the manifest weight of the evidence or clearly contrary to a rule of law. Village of Maywood v. Illinois Commerce Com., 23 Ill.2d 447, 453, 178 N.E.2d 345, 348; Illinois Central R.R. Co. v. Illinois Commerce Com., 387 Ill. 256, 275, 56 N.E.2d 432, 441.
• 2 The determination of rates is historically a legislative, not a judicial, function. (Illinois Central R.R. Co. v. Illinois Commerce Com., 387 Ill. 256, 275, 56 N.E.2d 432, 440; Illinois Bell Telephone Co. v. Illinois Commerce Com., 414 Ill. 275, 288, 111 N.E.2d 329, 336.) An order of the Commission is presumed valid and the decision of the Commission is entitled to great weight as a tribunal appointed by law and informed by experience. (Iowa-Illinois Gas & Electric Co. v. Illinois Commerce Com., 19 Ill.2d 436, 442, 167 N.E.2d 414, 417; Village of Apple River v. Illinois Commerce Com., 18 Ill.2d 518, 523, 165 N.E.2d 329, 332.) This deference to the Commission is particularly important in the rate-making function where the court may not substitute its judgment for the sound judgment of the Commission. (Illinois Bell Telephone Co. v. Illinois Commerce Com., 55 Ill.2d 461, 470, 303 N.E.2d 364, 369; Iowa-Illinois Gas & Electric Co. v. Illinois Commerce Com., 19 Ill.2d 436, 442, 167 N.E.2d 414, 417.) Nevertheless, the Commission may not ignore pertinent elements affecting the rate structure. (Illinois Bell Telephone Co. v. Illinois Commerce Com., 414 Ill. 275, 286, 111 N.E.2d 329, 335; Illinois Bell Telephone Co. v. Illinois Commerce Com., 55 Ill.2d 461, 470, 303 N.E.2d 364, 369.) With these principles in mind, we turn to the consideration of the particular issues raised.
• 3 A public utility is entitled to a fair return on the value of the property used in service to the public. In order to achieve the fair rate of return, the rates set by the Commission must be sufficient to cover operating expenses, depreciation, necessary reserves and provide for the Commission determined rate of return. (Illinois Bell Telephone Co. v. Illinois Commerce Com., 414 Ill. 275, 286, 111 N.E.2d 329, 335; (Illinois Bell Telephone Co. v. Illinois Commerce Com., 55 Ill.2d 461, 470, 303 N.E.2d 364, 369.) While income taxes are normally included in operating expenses, the Commission here determined that no income taxes were actually paid by the corporation. Monarch does not challenge this finding, but contends as a matter of law it is entitled to compensation for the amount the corporation would have paid had it not elected under Subchapter S of the Internal Revenue Code (26 U.S.C. § 1371 et seq.) to be taxed at the shareholder level.
• 4-6 Monarch contends that the purpose of Subchapter S would be frustrated if income taxes were not included in operating expenses. We do not agree. It is true, as Monarch contends, that the Subchapter S method of attributing income directly to stockholders does not convert the corporate entity into a partnership. (United States v. Silverman, 359 F. Supp. 1113 (N.D. Ill. 1973).) Thus an officer of the Subchapter S corporation may not invoke the fifth amendment privilege against self-incrimination in refusing to produce corporate records pursuant to an Internal Revenue Service subpoena. (United States v. Richardson, 469 F.2d 349 (10th Cir. 1972); United States v. Silverman, 359 F. Supp. 1113 (N.D. Ill. 1973).) Nor does the employment of shareholders by the Subchapter S corporation convert the shareholders from employees to partners. (Wilhelm v. United States, 257 F. Supp. 16 (Wyo. 1966).) But this is not dispositive of the issue here. Monarch fails to cite, and our research does not disclose, any intent on the part of the Congress to require the inclusion of income taxes that would have been paid in the operating cost of a public utility subject to state regulation.
Illinois courts> have dealt with the relationship of the Internal Revenue Code and the rate regulation of public utilities only infrequently. In City of Alton v. Commerce Com., 19 Ill.2d 76, 165 N.E.2d 513, the public utility opted for the accelerated depreciation as provided for by section 167 of the Internal Revenue Code rather than straight line depreciation. The Commission allowed the utility to subtract from gross income the amount of taxes the utility actually paid plus the increment that would have been paid had the utility not elected to depreciate under the accelerated method. In rejecting the contention that the Internal Revenue Code required this result, the court noted:
"We must remember, furthermore, that we are not here dealing with the tax treatment of utilities but with the pricing of their product, that is, with the rate charged for their services. Congress has provided that all corporations may reduce their taxes by accelerated depreciation. It has not required the money thus retained to be used for expansion." (City of Alton v. Commerce Com., 19 Ill.2d 76, 89, 165 N.E.2d 513.)
In reversing the Commission order, the court noted that while the continuous deferral of taxes due is within the discretion of the Commission, the benefit of the election of the accelerated depreciation must go to the ratepayers, and not to the utility shareholders.
In Federal Power Com. v. United Gas Pipe Line Co., 386 U.S. 237, 18 L.Ed.2d 18, 89 S.Ct. 1003, 1009 (1967), the utility claimed it was entitled to include the amount of income tax it would have paid had it not elected, under the Internal Revenue Code, to file a consolidated return as a member of an affiliated group. Because of the losses of some of the members, the utility paid taxes in an amount lower than it would have paid had it not opted to file the consolidated return. In dealing with the ...