MEMORANDUM OPINION
WILLIAM STANDISH, Senior District Judge
I
Before the Court is a motion by Plaintiff, the Commonwealth of Pennsylvania's Department of Public Welfare ("DPW"), to stay consideration of the motion for summary judgment filed by Defendants, Kathleen Sebelius, in her official capacity as Secretary of Health and Human Services (individually "Secretary") and the United States Department of Health and Human Services (individually "HHS"), to permit DPW to engage in limited discovery pursuant to Fed.R.Civ.P. 56(f). For the reasons set forth below, DPW's motion to stay will be denied.
II
The background and procedural history of this case may be summarized as follows:
On August 7, 2007, HHS's Inspector General submitted a report to the Administration for Children and Families ("ACF") concerning his audit of States' reimbursement of the Federal share of overpayments recovered in connection with the Aid to Families with Dependent Children ("AFDC") program which ended in 1996. The report noted that of the 43 States reviewed, 24 States had complied with Federal requirements and reimbursed ACF for the Federal share of overpayments recovered after the AFDC program ended, while the remaining 19 States, including the Commonwealth of Pennsylvania, and the District of Columbia continued to recover overpayments from former AFDC recipients and had not reimbursed ACF for the Federal share of the overpayments. The Inspector General recommended that ACF collect the Federal share of AFDC overpayment recoveries from the 19 States and the District of Columbia which had not complied with the Federal reimbursement requirement and that monitoring procedures be established to ensure that the Federal government receives its share of future State-recovered AFDC overpayments in a timely manner. (Docket No. 7-5, pp. 4-21).
Based on the Inspector General's audit report, HHS sent a letter to DPW on June 26, 2008, requesting reimbursement of the Federal share of AFDC overpayments recovered by DPW between October 1, 1996 and June 30, 2006, which totaled $5,609,572. (Docket No. 7-5, pp. 1-3). On July 28, 2008, DPW appealed the reimbursement request or "disallowance" to HHS's Departmental Appeals Board ("DAB"). (Docket No. 7-1, p. 23).
On April 16, 2009, the DAB issued a decision sustaining disallowance of the Federal share of AFDC overpayments recovered by DPW after the AFDC program ended. Succinctly stated, the DAB decision required the monies to be returned to HHS, contrary to DPW's position that it was legally authorized to use those funds to increase assistance to needy families under the Temporary Assistance for Needy Families program which replaced the AFDC program in 1996. (Docket No. 7-1, pp. 1-22).
DPW filed this civil action on June 23, 2009. In Count One, DPW seeks judicial review of the DAB's decision under the Administrative Procedures Act ("APA"), 5 U.S.C. § 706, and declaratory relief. In Count Two, DPW asserts a claim against HHS for violation of the Freedom of Information Act ("FOIA"), 5 U.S.C. § 522(a)(2), seeking declaratory and injunctive relief. (Docket No. 1).
On September 10, 2009, an Order was entered referring the case to non-binding arbitration to be completed by November 6, 2009. (Docket No. 6). Five days later, Defendants filed the administrative record in this case. (Docket No. 7). On October 6, 2009, the parties moved jointly to extend the time to complete arbitration. (Docket No. 8). The motion was granted and the deadline for completion of arbitration was extended to March 26, 2010. (Docket No. 9).
On March 10, 2010, the arbitration award was filed under seal, and, a week later, DPW requested a trial de novo. (Docket Nos. 13 and 14). Pursuant to an Order of Court dated April 6, 2010, which was entered following a case management conference, Defendants filed a motion for summary judgment under Fed.R.Civ.P. 56 on April 30, 2010, together with a concise statement of material facts and supporting brief. (Docket Nos. 15, 18-20). With respect to Count One of the complaint, Defendants assert DPW cannot establish that the DAB's decision was arbitrary, capricious or unlawful under the APA. As to Count Two, Defendants assert, among other things, that DPW lacks standing to pursue its FOIA claim. (Docket No. 19, pp. 1-2).
On May 21, 2010, DPW filed its brief in opposition to Defendants' summary judgment motion, a concise statement of material facts and a response to Defendants' concise statement of material facts. (Docket Nos. 21-23). A reply to DPW's brief in opposition was filed by Defendants on June 2, 2010, and DPW filed a sur-reply on June 15, 2010. (Docket Nos. 24 and 26). The next day, June 16, 2010, DPW filed the present motion to stay pending limited discovery under Fed.R.Civ.P. 56(f). (Docket No. 27).
III
A party requiring further discovery to oppose a motion for summary judgment must comply with Rule 56(f) of the Federal Rules of Civil Procedure, which provides in relevant part:
Rule 56. Summary Judgment
* * *
(f) When Affidavits Are Unavailable. If a party opposing the motion shows by affidavit that, for specified reasons, it cannot present facts essential to justify its opposition, the court may:
* * *
(2) order a continuance to enable affidavits to be obtained, depositions to be taken, or other discovery to be undertaken; . . .
* * *
Beyond the procedural requirement of filing an affidavit, Rule 56(f) requires that a party indicate to the district court its need for discovery, what material facts it hopes to uncover and why it has not previously discovered the information. Radich v. Goode, 886 F.2d 1391, 1393-94 (3d Cir. 1989), citing, Hancock Industries v. Schaeffer, 811 F.2d 225, 229-30 (3d Cir. 1987). See also Dowling v. City of Philadelphia, 855 F.2d 136, 139-40 (3d Cir. 1988) ("This court has interpreted Rule 56(f) as imposing a requirement that a party seeking further discovery in response to a motion for summary judgment submit an affidavit specifying, for example, what particular information is sought; how, if uncovered, it would preclude summary judgment; and why it has not previously been obtained.").
The purpose of Rule 56(f) is to prevent premature motions for summary judgment by allowing "a summary judgment motion to be denied . . . if the nonmoving party has not had an opportunity to make full discovery." Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986). See also Doe v. Abington Friends School, 480 F.3d 252, 257 (3d Cir. 2007) ("If discovery is incomplete in any way material to a pending summary judgment motion, a district court is justified in not granting the motion.").
IV
DPW has complied with the procedural requirement of Rule 56(f) by submitting the declaration of Jason W. Manne, its Deputy Chief Counsel, in support of the present motion. (Docket No. 27-1). DPW seeks limited discovery on two issues. One issue pertains to Count One of DPW's complaint; the other issue to Count Two.
Count One
In the memorandum filed in support of their motion for summary judgment on Count One of DPW's complaint, Defendants assert that the DAB's decision affirming disallowance of the Federal share of AFDC overpayments recovered by DPW after the AFDC program ended in 1996 is entitled to deference pursuant to the Supreme Court's decision in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). (Docket No. 19, p. 11). In response to the assertion that the DAB's decision is entitled toChevron deference, DPW has raised a constitutional challenge to the DAB under the Appointments Clause (Docket No. 21, pp. 12-14), an argument previously raised by DPW and rejected by the Court of Appeals for the Third Circuit inComm. of Pennsylvania v. United States Dept. of Health and Human Services, 80 F.3d 796 (3d Cir. 1996) (noting that in recognition of the enormous scope of the Secretary's responsibilities, Congress gave the Secretary carte blanche in 42 U.S.C. § 913 to appoint individuals to assist her in carrying out these duties, and holding that the Secretary's general appointment power under 42 U.S.C. § 913 authorized the Secretary to appoint DAB members because they are inferior officers for purposes of the Appointments Clause, rather than principal officers who must be appointed with the advice and consent of the Senate).
The Appointments Clause provides in relevant part:
. . . [the President] shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the Supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law; but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.
U.S. Const. Art. II, § 2, cl. 2.
42 U.S.C. § 913 provides in pertinent part:
". . . The Secretary is authorized to appoint and fix the compensation of such officers and employees, and to make such expenditures as may be necessary for carrying out the functions of the Secretary under this chapter. . . ."
The Appointments Clause divides all officers of the United States into two classes: principal officers and inferior officers. Only the former are appointed subject to the advice and consent of the Senate. See Morrison v. Olson, 487 U.S. 654, 670 (1988).
In summary, DPW asserts that the DAB's power is substantially broader today than it was in 1996 when the Court of Appeals for the Third Circuit held that DAB members were properly appointed by the Secretary because they were inferior officers under the Appointments Clause, and that if the DAB's broader power includes "statutory `gap-filling' authority — essentially stand-alone adjudicative rule making power," DAB members are principal officers for purposes of the Appointments Clause who must be appointed with the advice and consent of the Senate. (Docket No. 21, pp. 13-14). According to the declaration of Mr. Manne, DPW's Deputy Chief Counsel, DPW needs limited discovery to update the facts regarding the nature of the DAB today in order to have a complete record relating to DPW's Appointments Clause argument since it has been 14 years since the Court of Appeals for the Third Circuit rendered its decision on the status of DAB members under the Appointments Clause. (Docket No. 27, ¶¶ 10-11).
After consideration, the Court agrees with Defendants that a number of problems are presented by the Appointments Clause argument raised by DPW in response to their motion for summary judgment. (Docket No. 30, pp. 5-7). However, disposition of DPW's Rule 56(f) motion as to Count One of the complaint does not require resolution of those problems because the Court concludes that the DAB's decision in this case is not entitled to Chevron deference.
In Chevron, the Environmental Protection Agency ("EPA") promulgated regulations to implement requirements enacted by Congress in the Clean Air Act Amendments of 1977 ("CAA Amendments"). The requirement at issue related to States that had not attained the national air quality standards established by the EPA pursuant to earlier legislation. Under the CAA Amendments, the "non-attainment" States were required by Congress to establish a permit program regulating "new or modified major stationary sources" of air pollution. The EPA regulations promulgated to implement this permit requirement allowed States to adopt a plantwide definition of the term "stationary source." Under this definition, an existing plant that contained several pollution-emitting devices could install or modify one piece of equipment without subjecting the plant to the permit requirement if the installation or modification would not increase the total emissions from the plant. A timely petition for review was filed, and the Court of Appeals for the District of Columbia Circuit set aside the EPA regulations defining the term "stationary source." Subsequently, certiorari was granted by the Supreme Court, and the decision of the Court of Appeals was reversed.
The precise question presented in Chevron was whether the EPA regulations allowing States to treat all pollution-emitting devices within a plant as if they were encased within a single "bubble" was based on a reasonable construction of the term "stationary source" in the CAA Amendments. In holding that the EPA's construction was permissible, the Supreme Court stated:
* * *
"The power of an administrative agency to administer a congressionally created . . . program necessarily requires the formulation of policy and the making of rules to fill any gap left, implicitly or explicitly, by Congress."
Morton v. Ruiz,
415 U.S. 199, 231 (1974). If Congress has explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation. Such legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute. (footnote omitted). Sometimes the legislative delegation to an agency on a particular question is implicit rather than explicit. In such a case, a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency. (footnote omitted).
We have long recognized that considerable weight should be accorded to an executive department's construction of a statutory scheme it is entrusted to administer, (footnote omitted) and the principle of deference to administrative interpretations
"has been consistently followed by this Court whenever decision as to the meaning or reach of a statute has involved reconciling conflicting policies, and a full understanding of the force of the statutory policy in the given situation has depended upon more than ordinary knowledge respecting the matters subjected to agency regulations. (citations omitted).
". . . If this choice represents a reasonable accommodation of conflicting policies that were committed to the agency's care by statute, we should not disturb it unless it appears from the statute or its legislative history that the accommodation is not one that Congress would have sanctioned."
United States v. Shimer,
367 U.S. 374, 382, 383 (1961).
Accord,
Capital Cities Cable, Inc. v. Crisp,
ante, at 699-700.
In light of these well-settled principles it is clear that the Court of Appeals misconceived the nature of its role in reviewing the regulations at issue. Once it determined, after its own examination of the legislation, that Congress did not actually have an intent regarding the applicability of the bubble concept to the permit program, the question before it was not whether in its view the concept is "inappropriate" in the general context of a program designed to improve air quality, but whether the Administrator's view that it is appropriate in the context of this particular program is a reasonable one. Based on the examination of the legislation and its history which follows, we agree with the Court of Appeals that Congress did not have a specific intention on the applicability of the bubble concept in these cases, and conclude that the EPA's use of that concept here is a reasonable policy choice for the agency to make.
* * *
467 U.S. at 843-45.
Unlike Chevron, this case does not present a challenge to regulations promulgated by an agency to fill a gap left by Congress in a statutory scheme. Rather, it is a challenge to a DAB decision rendered in connection with a specific dispute between DPW and HHS regarding AFDC overpayment recoveries and is analogous to the facts presented in United States v. Mead Corp., 533 U.S. 218 (2001).
In Mead, after classifying an importer's day planners as duty free for several years, the Customs Headquarters Office issued a ruling letter classifying the day planners as bound diaries subject to tariff. The importer filed suit in the Court of International Trade to challenge the ruling and summary judgment was granted to the government. On appeal, the Court of Appeals for the Federal Circuit reversed, rejecting the argument of the United States Customs Service that the ruling was entitled to Chevron deference and holding that the ruling was entitled to no deference. The importer's petition for writ of certiorari was granted. The Supreme Court vacated the judgment of the Court of Appeals and remanded the case for further proceedings.
The Supreme Court in Mead agreed with the Court of Appeals that the tariff classification ruling was not entitled to deference under Chevron because there was no indication that Congress intended such a ruling to carry the force of law, stating:
* * *
We have recognized a very good indicator of delegation meriting
Chevron treatment in express congressional authorizations to engage in the process of rulemaking or adjudication that produces regulations or rulings for which deference is claimed. See, e.g.,
EEOC v. Arabian American Oil Co.,
499 U.S. 244, 257,
111 S.Ct. 1277,
113 L.Ed.2d 247 (1991) (no
Chevron deference to agency guideline where congressional delegation did not include the power to "`promulgate rules or regulations'" (quoting
General Elec. Co. v. Gilbert,
429 U.S. 125, 141,
97 S.Ct. 401,
50 L.Ed.2d 621 (2000) (BREYER, J., dissenting) (where it is in doubt that Congress actually intended to delegate particular interpretive authority to an agency,
Chevron is "inapplicable"). It is fair to assume generally that
Congress contemplates administrative action with the effect of law when it provides for a relatively formal administrative procedure tending to foster the fairness and deliberation that should underlie a pronouncement of such force. (footnote omitted). Cf.
Smiley v. Citibank (South Dakota), N.A.,
517 U.S. 735, 741,
116 S.Ct. 1730,
135 L.Ed.2d 25 (1996) (APA notice and comment "designed to assure due deliberation"). Thus, the overwhelming number of our cases applying
Chevron deference have reviewed the fruits of notice-and-comment rulemaking or formal adjudication. (footnote omitted). That said, and as significant as notice-and-comment is in pointing to
Chevron authority, the want of that procedure here does not decide the case, for we have sometimes found reasons for
Chevron deference even when no such administrative formality was required and none was afforded, see, e.g.,
NationsBank of N.C., N.A. v. Variable Annuity Life Ins. Co.,
513 U.S. 251, 256-257, 263,
115 S.Ct. 810,
130 L.Ed.2d 740 (1995). (footnote omitted). The fact that the tariff classification here was not a product of such formal process does not alone, therefore, bar the application of
Chevron. There are, nonetheless, ample reasons to deny
Chevron deference here. The authorization for classification rulings, and Customs's practice in making them, present a case far removed not only from notice-and-comment process, but from any other circumstances reasonably suggesting that Congress ever thought of classification rulings as deserving the deference claimed for them here.
B
No matter which angle we choose for viewing the Customs ruling letter in this case, it fails to qualify under
Chevron. On the face of the statute, to begin with, the terms of the congressional delegation give no indication that Congress meant to delegate authority to Customs to issue classification rulings with the force of law. . . . It is true as well that Congress had classification rulings in mind when it explicitly authorized, in a parenthetical, the issuance of "regulations establishing procedures for the issuance of binding rulings prior to the entry of the merchandise concerned,"
19 U.S.C. § 1502(a). (footnote omitted). The reference to binding classifications does not, however, bespeak the legislative type of activity that would naturally bind more than the parties to the ruling, once the goods classified are admitted into this country. And though the statute's direction to disseminate "information" necessary to "secure" uniformity,
ibid., seems to assume that a ruling may be precedent in later
transactions, precedential value alone does not add up to
Chevron entitlement; interpretive rules may sometimes function as precedents, see Strauss, The Rulemaking Continuum, 41 Duke L.J. 1463, 1472-1473 (1992), and they enjoy no
Chevron status as a class. . . .
522 U.S. at 229-32.
Although the Supreme Court agreed with the Court of appeals inMead that the tariff classification ruling was not entitled toChevron deference, it did not agree with the Court of Appeals' further conclusion that the ruling was not entitled to any deference. As a result, the case was remanded to the Court of Appeals for further proceedings to determine what deference was due to the ruling consistent with Skidmore v. Swift Co., 323 U.S. 134 (1944) (in applying Fair Labor Standards Act, rulings of administrator thereof are not controlling upon courts, but may be resorted to for guidance; weight to be given by court to administrator's ruling is dependent upon thoroughness evident in its consideration, validity of its reasoning, and consistency with earlier and later pronouncements). Similarly, the Court concludes that the DAB's decision in this case is entitled to some deference under Skidmore due to the complexity of the regulatory scheme at issue and the DAB's experience in resolving disputes arising out of that regulatory scheme.
Like the tariff classification ruling in Mead, the Court concludes that the DAB's decision in this case is not entitled toChevron deference. The decision is limited to the rights of the parties in this case with respect to the AFDC overpayments recovered by DPW since the AFDC program ended in 1996. It is not an exercise of gap-filling authority that carries the force of law which would exceed the authority of inferior officers under the Appointments Clause.
In sum, the conclusion that the DAB's decision in this case is not entitled to Chevron deference eliminates the basis for DPW's renewal of its Appointments Clause argument regarding the Secretary's appointment of the DAB. As a consequence, limited discovery to update the facts regarding any increase in the DAB's power since the Court of Appeals for the Third Circuit's decision in 1996 is unnecessary and will be denied.
Count Two
In Count Two of the complaint, DPW asserts that an index of the DAB's final decisions and orders issued in the adjudication of cases is not maintained by Defendants in violation of FOIA. (Docket No. 1, ¶ 19). In support of DPW's Rule 56(f) motion with respect to Count Two, Mr. Manne, DPW's Deputy Chief Counsel, avers that during the 1980s, the DAB maintained a paper index of its decisions which has since been discontinued; although DAB opinions are available on HHS's website, the opinions can only be found by a keyword search; Defendants' assertion that DAB decisions can be searched by topic on HHS's website — to the extent it implies something other than a keyword search — is false; the lack of an index of DAB decisions has hampered his effective representation of DPW before the DAB because he can never be certain that he has located all important DAB decisions on a topic; he solicited opposing counsel to enter into a stipulation of fact on this issue but counsel did not respond; and, based on the foregoing, limited discovery regarding the search capabilities of HHS's website for DAB decisions is required. (Docket No. 27-1, ¶¶ 5-9).
The relevant provision of FOIA states:
. . . Each agency shall also maintain and make available for public inspection and copying current indexes providing identifying information for the public as to any matter issued, adopted, or promulgated after July 4, 1967, and required by this paragraph to be made available or published. Each agency shall promptly publish, quarterly or more frequently, and distribute (by sale or otherwise) copies of each index or supplements thereto unless it determines by order published in the Federal Register that the publication would be unnecessary or impracticable, in which case the agency shall nonetheless provide copies of such index on request at a cost not to exceed the direct cost of duplication. Each agency shall make the index referred to in subparagraph (E) available by computer telecommunications by December 31, 1999. . . .
5 U.S.C. § 552(a)(2)(E).
Mr. Manne gives the following example to support this averment:
. . . For example, I often want to find DAB cases setting forth the principle that a State's interpretation of an ambiguous statute, regulation, or state plan is entitled to prevail over a Federal interpretation if the State has not been given notice of the Federal interpretation. Those cases are difficult to locate by key word because the DAB does not use uniform wording in discussing the issue. However, the underlying concept is "deference," and I would expect that topic to be included in an adequate index.
(Docket No. 27-1, ¶ 8).
In their motion for summary judgment, Defendants assert that they are entitled to judgment as a matter of law on DPW's FOIA claim because, among other things, DPW lacks standing to bring this claim (Docket No. 19, pp. 21-23), and the Court agrees with Defendants that DPW is not entitled to discovery concerning the search capabilities of HHS's website for DAB decisions pending a ruling on the standing issue. (Docket No. 30, pp. 3-4). Under the circumstances, DPW's Rule 56(f) motion as to Count Two will be denied without prejudice.
s put. In this case, the sole use of the entire LNG facility is to make natural gas suitable for storage. Marketable natural gas enters the facility, is stored, and approximately the same volume of marketable natural gas leaves the facility when the gas is needed for consumption. In no way is a marketable product
produced by the LNG facility — a marketable product is merely
stored there. [
Tenn. Natural Gas Lines, Inc. v. Commissioner, supra at 94.]
Again, section 1.167(a)-11(b)(4)(iii)( b), Income Tax Regs., provides that "Property shall be classified according to primary use even though the activity in which such property is primarily used is insubstantial in relation to all the taxpayer's activities." Here, although wires within street light assets move electricity from distribution lines all the way to the luminaires, the sole purpose and primary use of the equipment is to produce light, not to distribute electricity. Tenn. Natural Gas Lines supports petitioner.
In III. Cereal Mills, Inc. v. Commissioner, supra, the taxpayer was in the corn milling business and "purchased and processed vast amounts of shelled corn." The taxpayer argued that the grain storage tanks owned by its subsidiary fell within asset class 01.1, Machinery and equipment, including grain bins and fences but no other land improvements. See Rev. Proc. 72-10, 1972-1 C.B. at 723. Asset class 01.1 fell within the business-activity category 01.0, Agriculture, which included "only such assets as are * * * used in the production of crops * * * [or] the performance of agricultural * * * services." Id. The Commissioner argued that the grain storage tanks did not fall within asset class 01.1 because the taxpayer "primarily used [them] as storage for * * * raw materials for its manufacturing processes." III. Cereal Mills, Inc. v. Commissioner, supra. The Court found for the taxpayer because the subsidiary operated the storage facility "in the same manner" as the previous owner. Id. Moreover, even though the taxpayer purchased "between 45 and 60 percent of the grain" that the subsidiary stored at the storage facility, the taxpayer "would do so regardless of who owned and operated the facility." Id. The Court considered the grain storage business "at most * * * merely complementary" to the taxpayer's corn milling and manufacturing operation. Id. Importantly, the Court doubted that the Commissioner would have challenged that the grain storage tanks were "used in the production of crops" or "the performance of agricultural * * * services" had the storage facility been "owned and operated by someone other than" the taxpayer or its subsidiary. Id.
Similarly, we doubt that respondent would assert that street light assets were used in the distribution of electricity for sale were they owned and operated by some entity other than an electric utility. III. Cereal Mills supports petitioner.
b. The Sale of Electricity
Respondent implicitly argues according to the following syllogism: (1) The sale of street and area lighting is the sale of an electric service; (2) the sale of electricity is the sale of an electric service; and, therefore, (3) the sale of street and area lighting is the sale of electricity. Even assuming the truth of the premises (which we do not), that syllogism is invalid; specifically, it is an example of the fallacy of the undistributed middle. In other words, an answer to respondent's argument is that not every sale of an electric service is the sale of electricity.
The middle term is the one (the sale of an electric service) that appears in both the major (first) and minor (second) premises. It is undistributed because neither premise describes every sale of an electric service; rather, the premises describe subsets of those sales that do not necessarily coincide. Therefore, the middle term fails to connect the sale of street and area lighting to the sale of electricity; both kinds of sales could separately constitute sales of electric services.
The syllogistic fallacy notwithstanding, petitioner uses street light assets to sell light, not electricity. Electricity is simply the raw material street light assets use to make light.
2. Analogy With Asset Class 49.21
Respondent asserts that asset class 49.14, Electric Utility Transmission and Distribution Plant, is analogous to asset class 49.21, Gas Utility Distribution Facilities, which "[i]ncludes gas water heaters and gas conversion equipment installed by utility on customers' premises on a rental basis". Rev. Proc. 87-56, 1987-2 C.B. at 685. Respondent argues that, if asset class 49.21 includes "gas conversion equipment", then, by analogy, asset class 49.14 includes "electricity conversion equipment" such as street light assets.
Respondent's argument is unconvincing; indeed, its logic cuts against him. The implicit premise of his argument is that the inclusion in asset class 49.21 of "gas water heaters and gas conversion equipment" was unnecessary. That is, asset class 49.21 would have encompassed those assets even without their explicit inclusion. Only that can explain respondent's conclusion that asset class 49.14 includes "electricity conversion equipment" despite the lack of any reference thereto.
Respondent seems to have the argument backward. Much more likely is that asset class 49.21 explicitly includes "gas conversion equipment" precisely because otherwise it would not. (Respondent does not explain the reason asset class 49.21 includes the superfluous "gas conversion equipment".) Therefore, respondent's argument cuts in favor of petitioner, because the absence of any reference to "electricity conversion equipment" in asset class 49.14 suggests that asset class 49.14 does not include such equipment. As petitioner observes, the Commissioner had the authority to include "electricity conversion equipment" (or, even better, "street and area lights") in asset class 49.14, and he did not.
3. The Business-Activity Category
Asset class 49.14 falls within the business-activity category titled "Electric, Gas, Water and Steam, Utility Services", see Rev. Proc. 87-56, 1987-2 C.B. at 685, which respondent asserts "broadly encompasses any activity involving the sale of electricity, gas, steam, or water services." Rev. Proc. 87-56, 1987-2 C.B. at 685, however, is not quite that broad, stating that the business-activity category in question "[i]ncludes assets used in the production, transmission and distribution of electricity, gas, steam, or water for sale including related land improvements." Respondent, at best, misquotes the business-activity category. Regardless, barring circular arguments, the actual business-activity category in question in no way supports respondent.
4. The Regulatory Framework
In 1997, PPL was a regulated utility subject to the National Electric Safety Code (NESC), the National Electric Code (NEC), the Occupational Safety and Health Administration (OSHA), the Federal Energy Regulatory Commission (FERC), and the Pennsylvania Public Utilities Commission (PUC). Respondent argues that the frameworks of all five support his classification of street light assets.
a. The Safety Codes
Three safety codes apply to street and area lighting: the NESC, the NEC, and the OSHA standards and regulations (the OSHA work rules). The purpose of the NESC is "the practical safeguarding of persons during the installation, operation, or maintenance of electric supply and communication lines and associated equipment"; the purpose of the NEC is "the practical safeguarding of persons and property from hazards arising from the use of electricity." The transition point between the NESC and the NEC is the service point. In effect, the NESC governs assets (including street light assets) that electric utilities control, and the NEC governs assets (including street light assets) that customers control. The OSHA work rules have a similar internal division: One set of rules, 29 C.F.R. sec. 1910.269 (1997), applies to electric power generation, transmission, and distribution; and another, 29 C.F.R. sec. 1910.302 (1997), applies to electric utilization systems. Again, the dividing line is control.
First, the NESC (and not the NEC) controls here because the NESC governs street light assets that PPL controlled. Under the NESC, "utilization equipment" includes "[e]quipment, devices, and connected wiring that utilize electric energy for mechanical, chemical, heating, lighting, testing, or similar purposes and are not a part of supply equipment, supply lines, or communication lines." "Electric supply equipment" includes "[e]quipment that produces, modifies, regulates, controls, or safeguards a supply of electric energy." Respondent argues that street light assets are electric supply equipment because they "modify, regulate, and control the supply of electricity to customers." Such a broad reading of electric supply equipment not only ignores but also guts the definition of utilization equipment. What could possibly fall within the latter given respondent's broad reading of the former? Respondent is incorrect; we find that street light assets use "electric energy for * * * lighting". For that reason, under the NESC, street light assets are utilization equipment. The NESC supports petitioner.
Second, the OSHA work rules that govern street light assets that PPL controlled are those that apply to electric power generation, transmission, and distribution. The two sets of OSHA work rules are intended to separate those assets that electric utilities generally control ("electric power generation, control, transformation, transmission, and distribution lines and equipment", 29 C.F.R. sec. 1910.269(a)(1)(i)) from those assets that others generally control ("electrical installations and utilization equipment installed or used within or on buildings, structures, and other premises", 29 C.F.R. sec. 1910.302(a)(1)). Given the problem we here face, we find the OSHA work rules without probative — and certainly without legal — value. The OSHA work rules do not support respondent.
In Saginaw Bay Pipeline Co. v. United States, 338 F.3d 600, 605-606 n. 9 (6th Cir. 2003), the Court of Appeals for the Sixth Circuit rejected the reliance of the trial court on a case of the Court of Appeals for the Fifth Circuit. In that case, the Court of Appeals for the Fifth Circuit "had construed federal natural gas pipeline safety regulations to require that `gathering* lines must attach directly to wellheads." Id. The Court of Appeals for the Sixth Circuit not only found the construction of the safety regulation to be "facially open to question", but noted that "any persuasive weight" the case might have "would be restricted to construction of the laws governing natural gas pipeline safety". Id. "No evident rationale supports the application of a safety regulation's judicially-refined definition of `gathering pipeline' to the income tax depreciation regulations, given the total dissimilarity of the purposes of the two sets of standards." Id. We are similarly reluctant to consider electric safety regulations relevant to those same income tax depreciation regulations.
b. The Accounting Regulations
The FERC Uniform System of Accounts sets forth a standard system of accounting used by public utilities and other entities that, among other things, enables Federal, State, and municipal regulators to compare those public utilities and to set retail and wholesale rates for electricity, FERC regulated PPL's wholesale rates, (PUC regulated PPL's retail rates.) PPL recorded street light assets used for street lighting under FERC account 373, Street Lighting and Signal Systems, and recorded street light assets used for area lighting under FERC account 371, Installations on Customers' Premises, FERC accounts 371 and 373 both fall under the heading Distribution Plant.
PPL reported its street and area lighting as the sale of kilowatt-hours, the basic unit of measurement for the supply of electricity. PPL charged retail customers according to the electric rates that the applicable Pennsylvania regulatory agencies (primarily, PUC) established. In 1997, PPL charged so-called bundled rates, meaning that every rate included the cost of generation, transmission, distribution, and all other cost components; that is, PPL did not charge separately for each cost component. In 1997, street and area lighting constituted approximately 0.6 percent of PPL's total electricity sales.
Respondent insists that, although "not determinative", the inclusion of street light assets in FERC accounts under the heading Distribution Plant is "persuasive" that both the electric utility industry and FERC consider street light assets "to be primarily used for distribution." In support, respondent invokes Duke Energy Natural Gas Corp. v. Commissioner, 172 F.3d 1255 (10th Cir. 1999), rev'g. 109 T.C. 416 (1997). In that case, the Court of Appeals for the Tenth Circuit found the "distinction that FERC makes between gathering and transmission lines * * * persuasive that the gas industry and the regulatory body overseeing it consider gathering systems to be used for the activity of production, rather than transportation." Id. at 1262.
Respondent has failed to convince us that the inclusion of street light assets in FERC accounts under the heading Distribution Plant suggests anything about the proper classification of those assets for purposes of depreciation. In 1922, the Federal Power Commission (FERC'S predecessor) adopted the first Uniform System of Accounts, which included account 357, Street lighting equipment, under the heading Utilization Capital. In 1936, the Federal Power Commission revised the Uniform System of Accounts, eliminating the separate functional groupings for Utilization Capital (and for Joint Transmission and Distribution Capital). We are not convinced that the change represented anything more than an attempt to simplify the regulatory regime.
That FERC required PPL to account for street and area lighting revenues as sales of electricity does not necessarily mean that service is best characterized as the sale of electricity; it could simply mean that the distinction was not sufficiently important to be made for regulatory purposes. Indeed, given that in 1997 street and area lighting constituted less than 1 percent of PPL's total electricity sales, the latter explanation strikes us as highly plausible.
The relevant FERC account is account 444, Public Street and Highway Lighting. There are two subheadings under the heading Operating Revenue; viz, (1) Sales of Electricity and (2) Other Operating Revenues. Account 444 is under the first subheading, Sales of Electricity. Account 444 "[includes] the net billing for electricity supplied and services rendered for the purposes of lighting streets, highways, parks and other public places * * * for municipalities or other divisions or agencies of state or Federal Governments." That FERC included account 444 under Sales of Electricity strikes us as sensible; electricity is the critical raw material required for street and area lighting, and reporting street and area lighting revenues as the sale of electricity surely simplifies the accounting.
The Supreme Court has long recognized "the vastly different objectives that financial and tax accounting have." Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 542 (1979).
The primary goal of financial accounting is to provide useful information to management, shareholders, creditors, and others properly interested; the major responsibility of the accountant is to protect these parties from being misled. The primary goal of the income tax system, in contrast, is the equitable collection of revenue; the major responsibility of the Internal Revenue Service is to protect the public fisc. * * * [
Id.]
We find the FERC Uniform System of Accounts to be of little relevance in answering the question before us.
5. PPL's Treatment of Street Light Assets
Respondent argues that PPL treated street light assets no differently from other distribution assets, and thus he concludes that street light assets are distribution assets.
That argument, if stated as a syllogism, is another example of the fallacy of the undistributed middle. See supra note 8 and accompanying text.
First, "PPL's transmission and distribution personnel operated and maintained PPL's street and area lighting". Second, "PPL's distribution specifications and instruction manuals incorporate specifications and engineering instructions for street and area lighting." Third, "PPL warehouses its Street Light Assets at its System Facilities Center in Hazelton, Pennsylvania, and commingles the Street Light Assets with other distribution materials." Fourth, "in identifying Street Light Assets * * * for internal use, PPL groups Street Light Assets with its distribution facilities." Surely what PPL did was for convenience. Respondent's argument is of no avail.
6. The Intent of Treasury
Respondent argues:
Treasury designed the asset classification system to be as comprehensive as possible. Electric utility street [and area] lighting predates the asset classification system by more than half a century. * * * It is unlikely that Treasury simply ignored street [and area] lighting or intended to exclude street [and area] lighting from the applicable classes.
* * * * * * *
* * * the asset classification system addresses all the industry's primary activities, including street and area lighting. * * * As a matter of historical fact and industry practice, street and area lighting is part of distribution. * * * Treasury therefore intended for the classification system to incorporate street and area lighting as part of a utility's distribution activity.
Respondent makes a plausible argument yet presents no evidence in its support. Even if Treasury intended asset class 49.14 to include street light assets, however, a preponderance of the evidence supports our conclusion that asset class 49.14 does not include those assets. Again, had the Commissioner explicitly included "electricity conversion equipment" in asset class 49.14, just as he included "gas conversion equipment" in asset class 49.21, we might answer the question before us differently. See Rev. Proc. 87-56, 1987-2 C.B. at 685. For whatever reason, he did not. Because street light assets are, in fact, primarily used to provide a lighting service and not to distribute electricity for sale, to resolve any ambiguity about the intent of the Treasury against respondent is under the circumstances fair and proper.
C. Conclusion
We find that petitioner has carried its burden of proof. Street light assets are "primarily used" to make light, not to distribute electricity. See sec. 1.167(a)-11(b)(4)(iii)(6), Income Tax Regs. Quite simply, street light assets provide light for public safety. Moreover, that that activity is insubstantial in relation to all petitioner's activities is irrelevant. See id. We thus find that street light assets are not used in the distribution of electricity for sale.
V. Land Improvements
A. Introduction
Although at trial respondent waived any argument that street light assets fell into any asset class other than asset class 49.14, on brief respondent suggested for the first time that "in the hands of a * * * taxpayer that does not sell electricity, Street Light Assets constitute a land improvement." Because respondent appeared to raise a new argument on brief, we ordered the parties to address the question.
In his supplemental brief, respondent argues that if street light assets do not fall within asset class 49.14, then they fall within asset class 00.3, Land Improvements, which includes "improvements directly to or added to land". See Rev. Proc. 87-56, 1987-2 C.B. at 677 ("Examples of * * * [land improvements] might include sidewalks, roads, canals, water-ways, drainage facilities, sewers * * *, wharves and docks, bridges, fences, landscaping, shrubbery, or radio and television transmitting towers."). Petitioner denies that street light assets are land improvements. We agree with petitioner.
Because he raises a new argument on brief that strikes us as contrary to his principal argument, respondent bears the burden of proving that, if street light assets do not fall within asset class 49.14, then they fall within asset class 00.3. See Rule 142(a); see also Shea v. Commissioner, 112 T.C. 183 (1999). Respondent does not argue otherwise.
B. Analysis
In Trentadue v. Commissioner, 128 T.C. 91, 99 (2007), we described the standards applicable to classifying assets as land improvements. We stated: "Generally, the [applicable] class life categories cover two broad groupings — permanent improvements to real property, and machinery and equipment that is not a real property improvement." Id. at 98. We addressed the proper classification of certain assets the taxpayers used in their vineyard: trellises for the grapevines, the drip irrigation system, and a well. Id. at 93-97. In our analysis, we applied the guidelines we had derived in Whiteco Indus., Inc. v. Commissioner, 65 T.C. 664 (1975) (finding that, for purposes of the investment tax credit, outdoor advertising signs constituted tangible personal property, not land improvements). Although the guidelines comprise six factors,
their primary focus is the question of the permanence of depreciable property and the damage caused to it or to realty upon removal of the depreciable property. No one factor has been considered to be determinative, and the guidelines have been used merely as an aid to deciding whether a particular property is or is not a permanent improvement to real property. [
Trentadue v. Commissioner, supra at 99.]
As to street lights bolted to wood poles and area lights bolted to buildings, we find that, under the Whiteco Indus. guidelines, those street light assets are not affixed to anything in an inherently permanent way. Cf. Standard Oil Co. v. Commissioner, 77 T.C. 349, 406 (1981) ("Without extensive consideration, it is clear to us that, under the standards enunciated in the Whiteco case, the sign heads and light fixtures are not affixed to anything in an inherently permanent way."); Musco Sports Lighting, Inc. v. Commissioner, T.C. Memo. 1990-331 ("The lights in the instant case were merely bolted to the poles so, like the signs and lights in Standard Oil, they were not affixed to anything in an inherently permanent way."), aff'd. 943 F.2d 906 (8th Cir. 1991). As to street lights mounted on aluminum, steel, and boulevard fiberglass poles, we discuss each Whiteco Indus, factor in turn.
Respondent cites Metro Nat'l. Corp. v. Commissioner, T.C. Memo. 1987-38, for the proposition that sprinkler heads are an essential part of an underground water system even though they are easily disconnected from that system. Because sprinkler heads are functionally "inseparable from, and give utility to, the underground pipes", they are part of the underground water system, an inherently permanent structure. Id. Respondent argues that street light assets are analogous to sprinkler heads. We disagree. Street light assets are not functionally inseparable from, and do not give utility to, distribution lines. (Service drops, however, are functionally in-separable from, and do give utility to, those lines. Thus, service drops, and not street light assets, are analogous to sprinkler heads. See supra sec. IV.B.l.a. of this report, in which we discuss the difference between service drops and street light assets.)
See infra note 14 for a discussion of nonboulevard fiberglass poles.
1. "Is the property capable of being moved, and has it in fact been moved?" Whiteco Indus., Inc. v. Commissioner, supra at 672.
Street light assets are capable of being moved, and they have in fact been moved. Aluminum, steel, and boulevard fiberglass poles are bolted to concrete foundations. The poles can be quickly removed by loosening the bolts and are generally reused in other installations. Indeed, petitioner's engineering instructions for street and area lighting directs that "[l]ow-mounted fluted (boulevard) standards shall not be scrapped." Moreover, in many cases the foundations are pre-cast concrete "plugs" that can be reused.
Street light assets have been moved and reused, and petitioner's practice is to store used street light assets for future use. Accordingly, the first factor suggests that street light assets are not land improvements. Cf. Trentadue v. Commissioner, supra at 100 (finding that the first factor suggested that trellises were not land improvements because they had been moved and reused and the drip irrigation system was a land improvement because few of its components could be reused if removed); Standard Oil Co. v. Commissioner, supra at 407 (finding that poles for service station signs and lighting "designed to be bolted to * * * concrete foundations were moved from place to place * * * [and] were certainly capable of being removed, stored, and reinstalled at other locations"); Whiteco Indus., Inc. v. Commissioner, supra at 672 (finding that the first factor suggested the signs were not land improvements because they "are capable of being moved and have in fact been moved").
2. "Is the property designed or constructed to remain permanently in place?" Whiteco Indus., Inc. v. Commissioner, supra at 672.
Although street light assets can remain in place for their entire useful lives, they are both designed and constructed to be moved if necessary. Notwithstanding that street light assets are built to last, they are also built to be moved; they are not meant to remain permanently in place. Accordingly, the second factor suggests that street light assets are not land improvements. Cf. Trentadue v. Commissioner, supra at 100-101 (finding that the second factor suggested that trellises were not land improvements because they were "changed or modified to accommodate the growth or the feeding of the vines" and the drip irrigation system was a land improvement because, with a few exceptions, "removal of the pipes and tubes is not easily accomplished, and so, for all practical purposes, they are permanently embedded in the ground"); Standard Oil Co. v. Commissioner, supra at 407-408 (finding that poles "designed to be bolted to the appropriate concrete foundations were, because of such design, meant to be movable * * * [and thus] were not designed to remain permanently in place"); Whiteco Indus., Inc. v. Commissioner, 65 T.C. at 672 (finding that the second factor suggested that the signs were not land improvements because they "are designed or constructed to last for the term of a contract * * * [(an average of 5 years), after which] the sign structure requires substantial renovation").
3. "Are there circumstances which tend to show the expected or intended length of affixation, i.e., are there circumstances which show that the property may or will have to be moved?" Whiteco Indus., Inc. v. Commissioner, supra at 672.
Petitioner does not intend, and cannot realistically expect, street light assets to remain permanently in place. Petitioner often needs to move street light assets before the end of their useful lives, and thus the affixation of street light assets is inherently temporary. For example, street light assets are moved when streets and sidewalks are redone. Accordingly, the third factor suggests that street light assets are not land improvements. Cf. Trentadue v. Commissioner, 128 T.C. at 101 (finding that the third factor suggested that trellises and the drip irrigation system were land improvements because they were expected to service the grapevines during their useful lives); Standard Oil Co. v. Commissioner, 77 T.C. at 408 ("The poles designed to be bolted to the appropriate foundations were so designed because there are many circumstances that show that such poles might or would have to be moved."); Whiteco Indus., Inc. v. Commissioner, supra at 672-673 (finding that the third factor suggested that the signs were not land improvements because the taxpayer "does not intend, nor could it realistically expect, the signs to remain permanently in place").
4. "How substantial a job is removal of the property and how time-consuming is it? Is it `readily removable'?" Whiteco Indus., Inc. v. Commissioner, supra at 673.
The removal of street light assets is a relatively quick and easy process. Aluminum, steel, and boulevard fiberglass poles need simply to be unbolted from their concrete foundations, which are themselves often easily removed from the ground. Accordingly, the fourth factor suggests that street light assets are not land improvements. Cf. Trentadue v. Commissioner, supra at 102 (finding that the fourth factor was neutral as to trellises and the drip irrigation system because the removal of both "would be time consuming if the components were being salvaged for future use" but otherwise would be "quick and inexpensive"); Standard Oil Co. v. Commissioner, supra at 409 (finding that poles that took up to "24 man-hours of jobsite labor" to remove were "readily removable"); Whiteco Indus., Inc. v. Commissioner, supra at 673 (finding that the fourth factor suggested that the signs were not land improvements because the "disassembly and removal of a sign is a relatively quick and easy process"); JFM, Inc. Subs. v. Commissioner, T.C. Memo. 1994-239 ("Although the [gasoline pump] canopy components are collectively formidable, the whole structure can be erected * * * or dismantled and moved in a few days.").
5. "How much damage will the property sustain upon its removal?" Whiteco Indus., Inc. v. Commissioner, supra at 673.
The removal of street light assets does not damage them. Removing aluminum, steel, and boulevard fiberglass poles from concrete foundations involves simply loosening the bolts. No damage to street light assets or to any other property occurs. After the removal of the precast concrete "plugs", the resulting hole is filled with earth. Any disturbance is minimal. Accordingly, the fifth factor suggests that street light assets are not land improvements. Cf. Trentadue v. Commissioner, supra at 103 (finding that the fifth factor was neutral as to trellises and the drip irrigation system because their careful removal would mean great cost and small damage, and their quick removal would mean small cost and great damage); Whiteco Indus., Inc. v. Commissioner, supra at 673 (finding that the fifth factor suggested that the signs were not land improvements because "[m]uch of the sign assembly is not damaged when it is moved"); Fox Photo, Inc. v. Commissioner, T.C. Memo. 1990-348 (finding that modular, 1-hour photo labs, located predominantly in shopping center parking lots, "could be moved in 12 to 18 hours by five men in 2 to 3 days sustaining damage that was cheaper to repair than building a new lab").
6. "What is the manner of affixation of the property to the land?" Whiteco Indus., Inc. v. Commissioner, supra at 673.
Aluminum, steel, and boulevard fiberglass poles are bolted to concrete foundations; they are not permanently affixed to the land. Accordingly, the sixth factor suggests that street light assets are not land improvements. Cf. Trentadue v. Commissioner, supra at 103 (finding that the sixth factor suggested that the trellises, not set in concrete and so easily removed, were not land improvements and that the drip irrigation system, buried in the ground and not easily removed, was a land improvement); Whiteco Indus., Inc. v. Commissioner, supra at 673 (finding that the sixth factor suggested that the signs were not land improvements because, even though the poles were set in concrete, the poles "can easily be removed from the ground, and as a matter of practice, they are so removed").
C. Conclusion
Every Whiteco Indus, factor suggests that street light assets bolted to concrete foundations are not land improvements. There is not much evidence regarding nonboulevard fiberglass poles. Yet respondent bears the burden of proof as to whether street light assets fall within asset class 00.3, and the parties address all street light assets as one indivisible group. We thus find that, for all street light assets, respondent has failed to carry his burden. We find that street light assets are not land improvements and that is consistent with our findings in several other cases. See Trentadue v. Commissioner, 128 T.C. at 106-107 (finding that trellises were not land improvements, but that the drip irrigation system was a land improvement); Standard Oil Co. v. Commissioner, 77 T.C. at 409 (finding that poles bolted to concrete foundations that held signs (ranging from 15 to 17 feet and 90 to 110 feet) and lights were not land improvements); Whiteco Indus., Inc. v. Commissioner, 65 T.C. at 673 (finding that wood advertising signs were not land improvements); JFM, Inc. Subs. v. Commissioner, supra (finding that large gasoline pump canopies were not land improvements); Fox Photo, Inc. v. Commissioner, supra (finding that modular, one-hour photo labs were not land improvements).
Nonboulevard fiberglass poles are embedded approximately 5 feet in the ground and backfilled with cement, stone, and tamped earth. The cement foundations cannot be reused. Whether the fiberglass poles themselves can be reused is not clear. In Standard Oil Co. v. Commissioner, 77 T.C. 349, 407-409 (1981), we faced an almost identical situation, albeit in the context of the investment tax credit. In that case, in the absence of evidence, we stated that poles "embedded in concrete were probably movable", "seem as capable of being moved as those in Weirick v. Commissioner, [ 62 T.C. 446 (1974)]", "were possibly readily removable", and would sustain "possibly minimal" damage upon removal. Standard Oil Co. v. Commissioner, supra at 407-409. We found that the taxpayer had
failed to prove that the poles and * * * the concrete into which the [poles were] embedded are not "inherently permanent structures," though, with proof such as that which the Court of Claims had before it in * * * [ Southland Corp. v. United States, 222 Ct. CI. 22, 611 F.2d 348 (1979) (involving 20-foot poles holding signs outside "7-Eleven" stores)], we would likely find that they are not "inherently permanent structures." [ Id. at 409.]
VI. Conclusion
Street light assets are neither assets used in the distribution of electricity for sale nor land improvements. Thus, street light assets do not fall within asset class 49.14 or asset class 00.3; rather, street light assets fall within the residual class. Street light assets are property without a "class life" and not otherwise classified under section 168(e)(2) and (3); they are, therefore, "7-year property". See sec. 168(e)(3)(C)(ii); Rev. Proc. 87-56, 1987-2 C.B. at 675. As such, street light assets have a recovery period of 7 years. See sec. 168(c)(1). For that reason, PPL properly reclassified street light assets, and respondent incorrectly disallowed petitioner's negative adjustment and depreciation consistent therewith.