T.C. Memo. 2005-210
UNITED STATES TAX COURT
FPL GROUP, INC. AND SUBSIDIARIES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5271-96. Filed September 8, 2005.
Robert T. Carney, for petitioner.
Lawrence C. Letkewicz, for respondent.
MEMORANDUM OPINION
RUWE, Judge: This matter is before the Court on
petitioner’s motion for partial summary judgment filed pursuant
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to Rule 121.1 Petitioner seeks a determination that its method
of accounting, for purposes of determining repair versus capital
expenses for the taxable years 1988 to 1992, is what petitioner
characterizes as “the method required by Section 1.162-4 of the
Regulations”. In its first amended petition, petitioner claimed
that under this “method of accounting” it is entitled to
additional deductions for repair expenses in the following
amounts:
Year Amount
1988 $35,324,412
1989 52,115,791
1990 54,746,820
1990 56,823,897
1992 11,914,614
Total 210,925,534
The amounts in issue are expenditures made by petitioner’s wholly
owned subsidiary, Florida Power & Light Co. (Florida Power), an
electric utility. Petitioner filed consolidated returns with
Florida Power during the years in issue. As a utility, Florida
Power was subject to the regulatory rules of the Federal Energy
Regulatory Commission (FERC) and the Florida Public Service
Commission (FPSC).
1
Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code.
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We previously granted respondent’s motion for partial
summary judgment, holding that petitioner’s method of accounting
for tax purposes during the years in issue was the same method
that it used for FERC/FPSC regulatory and financial accounting
purposes. Petitioner had taken the position that it had always
been on “the method required by Section 1.162-4 of the
Regulations” for tax purposes. See FPL Group, Inc. & Subs. v.
Commissioner, 115 T.C. 554 (2000). We incorporate FPL Group,
Inc. & Subs. in this opinion.
Petitioner’s present motion for partial summary judgment is
a sequel to our prior ruling. Having lost its argument that it
was always on the “method of accounting” required by section
1.162-4, Income Tax Regs., rather than the method of accounting
prescribed by the FERC/FPSC, petitioner now argues that, if its
method of accounting for distinguishing between capital and
repair expenses was the FERC/FPSC accounting method, then
respondent changed petitioner’s method to the “method of
accounting” required by section 1.162-4, Income Tax Regs.
Petitioner bases this argument on the fact that, during the
examination for the years in issue, respondent examined items
that petitioner had expensed as repairs to determine whether
these items met the requirements of section 1.162-4, Income Tax
Regs. This examination resulted in an agreed adjustment wherein
approximately $1.2 million that had been deducted as repair
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expenses on petitioner’s returns for the years in issue was
required to be capitalized. Petitioner also relies on the fact
that, during the examination, it filed a claim for approximately
$21 million in additional repair expenses for the year 1992 of
which respondent’s agents allowed approximately $10.9 million as
additional repair expenses.
Respondent has never notified petitioner that he was
changing petitioner’s method of accounting, and respondent denies
that any of the aforementioned actions taken during the
examination had that effect. Indeed, in petitioner’s memorandum
in opposition to respondent’s previous motion for partial summary
judgment, which we granted, petitioner stated:
When seeking to capitalize repair expenses deducted by
Petitioner, at no time did Respondent assert that he
was changing Petitioner’s method of accounting or that
he had determined that Petitioner’s method did not
clearly reflect income as required under Section 446 of
the Code in order to require such a change. * * *
In its reply brief to respondent’s previous motion, petitioner
also stated: “At no time did Respondent’s agents propose a
‘change in method of accounting’ when proposing to disallow
repair expense for tax purposes”.
In its memorandum in opposition to respondent’s previous
motion for partial summary judgment, petitioner claimed that it
was using the “method of accounting” required by section 1.162-4,
Income Tax Regs., and that the amounts classified as repair
expenses for FERC/FPSC regulatory and financial reporting
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purposes and that were used in preparing its tax returns were
just the starting point for determining the amounts of deductible
repair expenses for tax purposes. Petitioner further claimed
that respondent’s agents were aware that this was petitioner’s
method of accounting. We disagreed, stating:
Petitioner has not alleged, nor is there any
indication, that respondent acquiesced in a method of
accounting which would allow petitioner to
“approximate” the amount of repair expenses and then
file amended returns when, and if, it realized it might
have deducted a larger amount. The fact that
petitioner amended its 1992 tax return for additional
expense claims does not change the fact that, in
preparing its original tax return, petitioner
consistently used the same characterizations that
Florida Power used for regulatory and financial
reporting purposes. Accordingly, we hold that the
audit adjustments by respondent do not establish the
method of accounting that petitioner is claiming. [FPL
Group, Inc. & Subs. v. Commissioner, supra at 570.]
After FPL Group, Inc. & Subs. petitioner sent a letter to
respondent making a “protective request” for a change of method
of accounting for the 1988-96 taxable years. In a letter dated
December 17, 2001, respondent denied this “protective request”.
In petitioner’s present motion for partial summary judgment,
petitioner asserts that respondent changed its method of
accounting to the “method required by Section 1.162-4 of the
Regulations” during respondent’s examination for the years in
issue. Respondent denies that he changed petitioner’s method of
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accounting. Alternatively, petitioner alleges that respondent
abused his discretion in denying petitioner’s protective request
to change to that method of accounting.
We do not think that respondent’s inquiry during the
examination into whether petitioner may have misclassified some
expenditures as either capital or repair expenses constituted a
change of petitioner’s method of accounting by respondent.
Indeed, the relatively minor changes that the parties agreed to
as a result of this examination lead to the conclusion that
petitioner’s method of following the FERC/FPSC regulatory
accounting for determining repair expenses for tax purposes
produced results that were in reasonable conformity with the
legal standards set forth in section 1.162-4, Income Tax Regs.
On its returns for the years in issue, petitioner characterized
approximately $2.1 billion in expenditures related to Florida
Power’s electric plants as repair expenses for tax purposes. FPL
Group, Inc. & Subs. v. Commissioner, supra at 558. Respondent’s
examination for the years in issue resulted in capitalizing
approximately $1.2 million that had been previously deducted as
repair expenses. Respondent’s proposed adjustment, which
petitioner agreed to, represents a change of approximately .0571
percent of the total repair expenses petitioner claimed on its
returns using the FERC/FPSC method of accounting. Likewise,
respondent’s allowance of an additional $10.9 million of repair
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expenses that petitioner claimed during the examination was
approximately .519 percent of the total repair expenses that
petitioner reported on its returns for the years in issue.2
We do not accept petitioner’s argument that the adjustments
that respondent made or allowed during the examination were
tantamount to changing petitioner’s method of accounting. The
fact that an examination concludes with the adjustment of some
items does not in itself constitute a change in the method of
accounting. Indeed, when an examination results in relatively
minor adjustments and the Commissioner does not explicitly reject
the taxpayer’s method, there would appear to be an acceptance of
the taxpayer’s method. As we stated in our prior Opinion, “the
audit adjustments by respondent, do not change the fact that
petitioner is retroactively attempting to recharacterize
expenditures that it regularly and consistently capitalized for
2
In our prior Opinion, we stated:
In the instant case, respondent allowed petitioner
certain additional repair expense deductions related to
Florida Power. Respondent did not question
petitioner’s method of accounting or assert that any
impermissible change was being made. Rather,
respondent simply reviewed petitioner’s claim and
allowed an additional deduction based on the
circumstances. Petitioner has not alleged any action
on respondent’s part which could be construed as
approving the method of accounting petitioner is
currently claiming for the expenditures in issue.
* * * [FPL Group, Inc. & Subs. v. Commissioner, 115
T.C. 554, 573 (2000).]
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regulatory, financial, and tax reporting purposes.” FPL Group,
Inc. & Subs. v. Commissioner, 115 T.C. at 570.
It is undisputed that respondent’s examination of the repair
versus capital expenses issue involved application of the
standards set forth in section 1.162-4, Income Tax Regs. That
regulation sets forth the general legal standards for deducting
repair expenses.3 Petitioner characterizes this regulation as
the “method of accounting” that respondent used during the
examination. Respondent disagrees with petitioner’s argument
that section 1.162-4, Income Tax Regs., constitutes a “method of
accounting”.
We do not accept petitioner’s characterization of section
1.162-4, Income Tax Regs., as a “method of accounting”
distinguishable from petitioner’s method of using the FERC/FPSC
regulatory standards. Petitioner has stated that it used the
3
Sec. 1.162-4, Income Tax Regs., provides:
§ 1.162-4. Repairs.--The cost of incidental
repairs which neither materially add to the value of
the property nor appreciably prolong its life, but keep
it in an ordinarily efficient operating condition, may
be deducted as an expense, provided the cost of
acquisition or production or the gain or loss basis of
the taxpayer’s plant, equipment, or other property, as
the case may be, is not increased by the amount of such
expenditures. Repairs in the nature of replacements,
to the extent that they arrest deterioration and
appreciably prolong the life of the property, shall
either be capitalized and depreciated in accordance
with section 167 or charged against the depreciation
reserve if such an account is kept.
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FERC/FPSC method to prepare its returns because it believed that
any expenditure that was classified as a repair under the
FERC/FPSC method would meet the deductibility standards of
section 1.162-4, Income Tax Regs. Petitioner filed its returns
(and prepared its financial statements) using the FERC/FPSC
regulatory accounting method rather than attempting to reexamine
the facts and circumstances of each expenditure to determine
whether each individual expenditure met the deductibility
standards of section 1.162-4, Income Tax Regs. The results of
respondent’s examination indicate that petitioner’s use of the
FERC/FPSC method of accounting produced results that were
generally consistent with the legal standards set forth in
section 1.162-4, Income Tax Regs.
Petitioner cites cases holding that where the Commissioner
has approved a taxpayer’s method of accounting during prior
examinations, the Commissioner may not change that taxpayer’s
method of accounting without determining that that method failed
to properly reflect income. See Geometric Stamping Co. v.
Commissioner, 26 T.C. 301 (1956); Klein Chocolate Co. v.
Commissioner, 36 T.C. 142 (1961). Since we have found that
respondent has never approved the “method of accounting” that
petitioner seeks, those case have no application here. Likewise,
Mamula v. Commissioner, 346 F.2d 1016 (9th Cir. 1965), revg. and
remanding 41 T.C. 572 (1964), is inapplicable since it involved
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an instance where the Commissioner changed the taxpayer’s method
of accounting. As we have held, respondent made no change to
petitioner’s method. However, we note that the court in Mamula
stated:
Once a taxpayer makes an election of one of two or more
alternative methods of reporting income, he should not
be permitted to convert, of his own volition, when it
later becomes evident that he has not chosen the most
advantageous method. * * * [Id. at 1018.]
Petitioner filed a protective request for a change of
accounting method after our prior Opinion at FPL Group Inc. &
Subs. v. Commissioner, 115 T.C. 554 (2000), in this case was
filed. Petitioner claims that the requested “method of
accounting” is required by section 1.162-4, Income Tax Regs.
Petitioner argues that respondent’s refusal to approve the
protective request was an abuse of discretion because respondent
required petitioner to continue to use an improper method; i.e.,
the FERC/FPSC method. Respondent denies that he ever determined
that petitioner’s use of the FERC/FPSC regulatory standards was
improper and, as we have previously indicated, the actions during
the examination do not establish that respondent made such a
determination. Petitioner seems to argue that we found in our
prior Opinion that petitioner’s use of the FERC/FPSC method of
accounting was improper. We disagree. We described petitioner’s
regulatory and financial accounting method as follows:
The FERC and FPSC rules provided a regulatory
accounting system which afforded petitioner a
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characterization method based on basic accounting
principles that generally require the capitalization of
expenditures for larger items of property having long-
term lives and the expensing of relatively smaller
expenditures for minor items needed for repairs. * * *
Petitioner’s attempt to change retroactively from a
consistent and logical method of capitalizing the
expenditures in issue to expensing them involves the
question of proper timing and thus is a material item.
* * * [FPL Group, Inc. & Subs. v. Commissioner, supra
at 566.]
As we have previously stated, section 1.162-4, Income Tax
Regs., sets forth legal standards for distinguishing between
expenditures that must be capitalized and those that can be
currently deducted. The method by which a taxpayer attempts to
comply with these legal standards for purposes of preparing its
returns is what should be properly described as the taxpayer’s
method of accounting. Petitioner used the FERC/FPSC regulatory
method of accounting to prepare its returns in order to achieve
the classification required by section 1.162-4, Income Tax Regs.
Petitioner now wants to use a different method. That different
method would be to reexamine the facts underlying individual
expenditures in an attempt to claim additional deductions for
repairs. It is this change that respondent declined to approve.
We find no abuse of discretion in respondent’s refusal.
Petitioner also argues that respondent abused his discretion
in denying its protective request because there is “no valid
basis” for requiring petitioner to use a method of accounting
that is contrary to section 1.162-4, Income Tax Regs. As
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previously discussed, we do not think that the FERC/FPSC method
is contrary to the regulation. Regardless of whether a taxpayer
used a proper or improper method of accounting, a taxpayer must
receive the Commissioner’s approval before changing a method of
accounting. Sec. 446(e); sec. 1.446-1(e)(2)(I), Income Tax
Regs.4 The Commissioner has wide discretion to decide whether to
consent to a taxpayer request to change a method of accounting.
Sunoco, Inc. & Subs. v. Commissioner, T.C. Memo. 2004-29. Here,
petitioner sought a retroactive change to its method of
accounting. The Commissioner generally will not grant
retroactive changes to a taxpayer’s method of accounting. See
sec. 1.446-1(e)(3)(I), Income Tax Regs.; Rev. Rul. 90-38, 1990-1
C.B. 57; Rev. Proc. 97-27, sec. 2.04, 1997-1 C.B. 680, 682. As a
result, we do not think respondent abused his discretion by
denying petitioner’s protective request for a change in method of
accounting.
Finally, petitioner alleges that respondent has allowed
unspecified competitors to claim additional repair expenses under
section 1.162-4, Income Tax Regs., even though they also followed
4
The reason for requiring the Commissioner’s consent was
stated in Lord v. United States, 296 F.2d 333, 335 (9th Cir.
1961), as follows: “If * * * [taxpayers] were allowed to report
income in one manner and then freely change to some other manner,
the resulting confusion would be exactly that which was to be
alleviated by requiring permission to change accounting methods.”
See also FPL Group, Inc. & Subs. v. Commissioner, 115 T.C. at
573-575.
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regulatory rules and guidelines to determine the amounts of
repair expenses deducted on tax returns. Relying on IBM v.
United States, 170 Ct. Cl. 357, 343 F.2d 914 (1965), petitioner
states that such disparate treatment “constitutes an abuse of
discretion as a matter of law.”5
In IBM, the taxpayer’s principal competitor had received a
private letter ruling that exempted certain of its equipment from
the business machines excise tax. IBM sought the same ruling and
filed a claim for refund. Two years later, having taken no
action on IBM’s request, the Commissioner decided to revoke the
ruling but only prospectively. At the same time, IBM’s claim for
refund was denied. Thus, for the period from the date that the
ruling was issued until the ruling was revoked, IBM was subject
to a tax to which a principal competitor was not. The Court of
Claims held, in this circumstance, that the Commissioner’s
failure to accord IBM the same treatment provided to its
competitor was an abuse of the discretion granted the
Commissioner by section 7805(b). Section 7805(b) allows the
Commissioner to prescribe the extent, if any, to which a ruling
5
Petitioner’s principal subsidiary made a similar claim in
Fla. Power & Light Co. v. United States, 56 Fed. Cl. 328 (2003),
alleging that its competitors had received rulings exempting them
from the highway use tax on vehicles identical or similar to its
own. The court rejected this claim.
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or regulation will be applied without retroactive effect. That
section is not involved here.
Petitioner has not provided the names of its competitors who
have allegedly obtained the Commissioner’s consent to a change in
method of accounting or described the method of accounting to
which the Commissioner has supposedly consented. Petitioner’s
conclusory allegation of disparate treatment without any showing
of specific facts that could possibly bring it with the ambit of
the IBM case is insufficient grounds for granting partial summary
judgment on the issue before us.
To reflect the foregoing,
An appropriate order will
be issued denying petitioner’s
motion for partial summary
judgment.