United States v. New York Telephone Co.

Background

A subsidiary telephone company, New York Telephone Company, bought plant and subscriber instruments from its parent, American Telephone & Telegraph Company, in 1925–1928. New York recorded those purchases at a so-called "structural value," creating a $4,166,510.57 difference credited as surplus or "profit" to the parent. The Federal Communications Commission ordered New York to charge that amount to surplus and restate accounts on an original-cost basis; a three-judge district court permanently enjoined the order, and the FCC appealed to this Court.

Reasoning

The core question was whether the FCC could require accounts to be restated on an original-cost basis and eliminate an apparent affiliate-created inflation. The Court read the Commission’s report as relying principally on its original-cost system and found the Commission could, after investigation, treat interaffiliate gains as fictitious paper increments rather than real investment. The Court applied the established view that the accounting company bears the burden to justify its entries, and held the Commission’s order was a permissible exercise of its accounting authority, reversing the district court.

Real world impact

The ruling gives the FCC authority to force utilities to remove inflated affiliate "write-ups" and to require original-cost accounting going forward. That can reduce reported surplus, affect depreciation and operating-expense entries, and change what companies report to regulators and investors. The decision leaves regulatory fact-finding to agencies, not courts, when accounting practices are disputed.

Dissents or concurrances

Chief Justice Stone would have affirmed, saying the Commission had not made the specific finding required by a prior government statement that an excess was not a "true increment of value."