In the
United States Court of Appeals
For the Seventh Circuit

No. 00-4072

WICOR, Inc.,

Plaintiff-Appellant,

v.

United States of America,

Defendant-Appellee.

Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 97 C 393--Aaron E. Goodstein, Magistrate Judge.

Argued June 5, 2001--Decided August 14, 2001



  Before Posner, Manion, and Rovner,
Circuit Judges.

  Posner, Circuit Judge. An affiliated
group of corporations that file a joint
federal income tax return brought this
suit on behalf of one of the affiliates,
the Wisconsin Gas Company, a retail
distributor of natural gas, for refund of
federal income taxes. The plaintiff
argues that the gas company was
incorrectly denied a tax credit under
section 41 of the Internal Revenue Code
and an unrelated deduction under section
1341. The district court entered judgment
for the government on the section 41
claim after trial and granted summary
judgment for the government on the
section 1341 claim.

  Section 41 provides a tax credit for
"qualified research," but a taxpayer
seeking the credit must prove that
hesatisfies seven separate requirements.
26 U.S.C. sec.sec. 41(d)(1)(A), (B)(i),
(B)(ii); United Stationers, Inc. v.
United States, 163 F.3d 440, 443-48 (7th
Cir. 1998); Norwest Corp. v.
Commissioner, 110 T.C. 454, 487-501
(1998). Four are at issue here and they
happen to be the ones that seek to limit
the credit to what can fairly be regarded
as significant "discoveries" worthy of
special encouragement. They are that the
research be for the purpose of
"discovering" technological information;
that it be experimental in character;
that it be innovative; and that it
involve significant economic (i.e.,
financial) risk. These requirements mark
off the domain of genuine research from
that of implementation of existing
research findings, United Stationers,
Inc. v. United States, supra, 163 F.3d at
444 ("discovery demands something more
than mere superficial newness; it
connotes innovation in underlying
principle"); Norwest Corp. v. United
States, supra, 110 T.C. at 493-96, and we
must decide whether the district court
committed a clear error in determining
that the gas company’s "research" fell on
the implementation side of the line.

  The company wanted to have an integrated
computer system that would process
service (including repair) orders, record
meter readings transmitted to terminals
in the company’s trucks, bill customers,
record transactions with customers, and
perform other mainly bookkeeping
functions. The company hired Andersen
Consulting, which had created similar
systems for other utilities, to create,
jointly with the gas company, the system
that the company wanted. Most of the
software for the project was acquired
from other companies, but Andersen and
the gas company did jointly develop a
program for integrating the various
components of the system.

  Their contract provided that the source
code for the integrated computer system
would be the property of Andersen. The
original of the source code was on the
premises of the gas company, yet Andersen
didn’t think enough of its property right
to bother to take a copy with it when the
project was completed. Since without the
source code it would be very difficult to
modify the system to make it usable by
other utilities, Andersen apparently
didn’t think the system would be usable
by any other utility. Andersen’s
abandonment of the source code was pretty
telling evidence that the project had
involved merely adapting existing
computer technology to the special needs
of the gas company rather than inventing
a new technology, embodied in the source
code, that would have a broader applic-
ability. Existing technology had to be
customized to the particular needs and
specifications of a particular customer
of Andersen’s; that was all. Genuine
innovation portable to other customers
would have motivated Andersen to take the
source code, the key to the use of the
innovation by other customers, with it
when it completed the project for the gas
company. So the district court did not
commit a clear error in finding that the
plaintiff had flunked the discovery test,
at least; nothing more was required to
deny the section 41 tax credit; and we
can move on to the second issue.

  Section 1341 of the Internal Revenue
Code provides, in effect and so far as
bears on this case, that if a
taxpayerincludes an item in his taxable
income in year y "because it appeared
that the taxpayer had an unrestricted
right to such item," and later, say in y
+ 1, "a deduction is allowable" for the
item because the taxpayer didn’t have an
unrestricted right to it after all, he
can assign the deduction to y, if he
wants, and so obtain a larger tax savings
if his tax rate was higher in y than in
y + 1. See 26 U.S.C. sec. 1341(a),
explained in United States v. Skelly Oil
Co., 394 U.S. 678, 680-82 (1969), and
Dominion Resources, Inc. v. United
States, 219 F.3d 359, 362-63 (4th Cir.
2000). The Wisconsin public service
commission had allowed the gas company to
treat as a cost of service, and hence to
include in its rates, certain anticipated
but not yet paid tax liabilities. When
(we simplify a bit) a change in tax law
resulted in a drop in those rates,
meaning that the company had charged its
customers for a cost it would not incur,
the commission required the company to
reduce its rates, thus transferring the
windfall from the company to its
customers.

  A numerical example, artificial only in
irrelevant respects, may help to
illuminate the issue. Suppose that the
gas company had obtained the windfall in
year y, that the windfall amounted to
$100 out of total rates of $300, that the
tax rate was 46 percent that year, and
that the commission required the company
in y + 1, when the tax rate had fallen to
34 percent, to reduce its rate from $300
to $200. In y, the company would have
paid a tax of $46 on the windfall. In y
+ 1, if section 1341 was inapplicable, it
would have avoided a tax of $34 (the tax
on the $100 that it was not permitted to
include in its rate that year). And so it
would end up having paid an additional
$12 in taxes as a result of not being
able to reassign the $100 rate reduction
from y + 1 to y. But if section 1341 is
applicable, the company can get a refund
of $46 for the taxes it paid in year y,
while paying $34 in additional taxes in y
+ 1. That is, it will pretend that it
charged $300 rather than $200 in y + 1
(and so pay an additional $34 in y + 1
taxes), but $200 rather than $300 in y,
entitling it to a $46 refund.

  The government concedes as it must that
(ignoring for a moment the word
"appeared" in section 1341(a)(1)) if in y
+ 1 the gas company, instead of reducing
its rate by $100, had charged the full
$300 but given the customer a $100
credit, the company would be entitled to
treat the $100 credit as if it were a
deduction from its y income, and thus
receive a $46 refund on its year y taxes.
That is how section 1341 operates.
Rhetorically the company asks what
functional difference there is between
such a credit and a reduction in the rate
of the same amount. In either case the
ratepayer ends up paying a net of $200.
There is a difference, however. In the
second case the company saves taxes just
by virtue of charging a lower rate. The
company paid $34 less in taxes in y + 1
because it charged a lower rate. If it
can get a credit of $46 for having lost
the $100 in windfall profits in y and at
the same time, in respect of the same
loss, obtain a $34 tax savings in y + 1,
its total tax benefit will be not $12 but
$80. The company realizes that this is
too much and wants only the $12, but this
amounts to restating its y + 1 income as
$300 and treating the $100 rate discount
as if it were a credit on the bill to the
customer.

  But is this the proverbial distinction
without a difference? We cannot think of
any fundamental or economic objection to
the restatement proposed by the gas
company, which would eliminate any
difference in taxation between a
utility’s being forced by the regulators
to reduce its rates and its being forced
to give its customers a credit in the
same amount. Because of customer
turnover, the people affected by the
different actions will not be identical,
but why should that matter? It matters
because we can’t locate any provision in
the Internal Revenue Code that allows a
seller to take a deduction for a
discount, and section 1341 is applicable
only if "a deduction is allowable" in y +
1. 26 U.S.C. sec. 1341(a)(2). Just the
other day we noted the infeasibility and
inappropriateness of courts’ "undertaking
to achieve global equity in taxation."
Kenseth v. Commissioner, No. 00-3705,
slip op. at 6, 2001 WL 881479, at *3 (7th
Cir. Aug. 7, 2001). When a company
reduces its price, this event is
reflected on its income tax return not by
including the old price as taxable income
and the difference between the old and
the new price as a deduction, but as
reducing taxable income to the new price.
When that is done for the gas company in
y + 1, there is nothing to deduct.
Taxable income has fallen from $300 to
$200. That is all. Unlike the situation
in Dominion Resources, Inc. v. United
States, supra, 219 F.3d at 368-70, where
the utility "allocate[d] refunds [ordered
by the regulatory authorities] to actual
customers who had made the overpayments
but fail[ed] to make a perfect match only
because it was ’not possible’ to do so,"
the gas company made no effort to refund
overpayments to particular customers,
thus bringing this case within the grasp
of Roanoke Gas Co. v. United States, 977
F.2d 131, 135-37 (4th Cir. 1992), and
Iowa Southern Utilities Co. v. United
States, 841 F.2d 1108, 1113-14 (Fed. Cir.
1988), and making it unnecessary for us
to consider the significance of
"appeared" in the section ("because it
appeared that the taxpayer had an
unrestricted right to such item").

  The government argues that, precisely
because the public utility commission did
not order the gas company to refund money
to any customer who had paid the inflated
rate in year y, there was nothing merely
apparent about the company’s right to
that rate. It got to keep the money,
though it was "punished" by being made to
reduce its rates for the future, in just
the way that the market might "punish" a
company for greedily raising its price,
inducing entry that forced prices back
down, perhaps to a level even lower than
before the company succumbed to greed.
The company argues that a prospective
lowering of rates is the mode of refund
that the public utility commission is
constrained by law to use. We need not
decide whether the company’s right to the
initial windfall rate was as the company
claims merely apparent, since the
decision would not affect the outcome of
the case, but will merely note for
completeness that the only appellate
cases to address the issue have sided
with the taxpayer. Dominion Resources,
Inc. v. United States, supra, 219 F.3d at
361; Van Cleave v. United States, 718
F.2d 193, 197 (6th Cir. 1983); Prince v.
United States, 610 F.2d 350, 352 (5th
Cir. 1980).

Affirmed.
