FPL Grp., Inc. v. Comm'r of Internal Revenue
| Citation | 115 T.C. 554,115 T.C. No. 38 |
| Decision Date | 13 December 2000 |
| Docket Number | No. 5271–96.,5271–96. |
| Parties | FPL GROUP, INC. and Subsidiaries, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Corporate taxpayer petitioned for review of IRS' denial of refund claimed on amended return, based on recharacterizing as repair expenses, the costs of its wholly-owned subsidiary, a regulated electric utility, which it had characterized as capital expenditures on initial consolidated tax return. The Tax Court, Ruwe, J., held that taxpayer's change from using method of accounting for tax reporting purposes consistently with method its subsidiary used for regulatory accounting and financial reporting purposes was a change in method of accounting, for which it failed to obtain consent of IRS.
Decision for IRS.
See also, 2001 WL 85184.
Robert Thomas Carney, for petitioner.
Gary F. Walker, Sergio Garcia–Pages, and Robert W. Dillard, for respondent.
F, a regulated electric utility, is a wholly owned subsidiary of P. F is required to follow prescribed regulatory rules for regulatory accounting and financial reporting purposes. In preparing its consolidated tax returns for the years in issue, P characterized F's expenditures by using the same characterization that F used for regulatory accounting and financial reporting purposes. In an amended petition, P sought to recharacterize as repair expenses, expenditures which it had characterized as capital expenditures for tax purposes.
Held: P's method of accounting for tax reporting purposes was to characterize the expenditures in issue consistently with the method that F used for regulatory accounting and financial reporting purposes. By seeking to alter the method which it used to characterize expenditures, P is attempting to change its method of accounting. P has failed to obtain the consent of the Secretary to change its method of accounting under sec. 446(e), I.R.C.; therefore, P is not entitled to the claimed expense deductions.
This matter is before the Court on respondent's motion for partial summary judgment filed pursuant to Rule 121.1 The sole issue presented is whether petitioner's attempt to recharacterize as repair expenses, expenditures which it had characterized on its tax returns as capital expenditures for the taxable years 1988 to 1992, is an impermissible change in accounting method under section 446(e).
FPL Group, Inc. (petitioner) is a corporation organized and existing under the laws of the State of Florida with its principal office located in Juno Beach, Florida. Florida Power & Light Co. (Florida Power) is a wholly owned subsidiary of petitioner. Petitioner filed consolidated returns with Florida Power during the years in issue.
On December 28, 1995, respondent issued a notice of deficiency for the taxable years 1988 through 1992. In its First Amended Petition, filed May 13, 1996, petitioner argued for the first time that respondent erred in failing to allow a deduction for certain repair expenses related to Florida Power when determining the deficiency amounts in the notice of deficiency. Petitioner claimed that it had improperly characterized the following expenditures related to Florida Power as capital expenditures and that it should have deducted them as repair expenses:
+------------------+
¦Year ¦Amount ¦
+-----+------------¦
¦1988 ¦$35,324,412 ¦
+-----+------------¦
¦1989 ¦52,115,791 ¦
+-----+------------¦
¦1990 ¦54,746,820 ¦
+-----+------------¦
¦1991 ¦56,823,897 ¦
+-----+------------¦
¦1992 ¦11,914,614 ¦
+-----+------------¦
¦Total¦210,925,534 ¦
+------------------+
Petitioner did not file a Form 3115, Application for Change in Accounting Method, with respondent to request a change in accounting method for the expenditures at issue. Respondent did not raise the change in accounting method issue prior to the filing of his motion for partial summary judgment.
Florida Power owns and operates fossil and nuclear electric generating plants in Florida and also owns interests in coal-fired electric generating plants in Georgia and Florida, which are operated by other utilities. Florida Power provides public electric utility services in Florida. Florida Power is subject to the regulatory rules of the Federal Energy Regulatory Commission (FERC) and the Florida Public Service Commission (FPSC). The FERC regulates the rates that Florida Power may charge to its wholesale customers. The FPSC regulates the rates that Florida Power may charge to its retail customers.
For regulatory purposes, property at Florida Power's electric generating plants (electric plants) is considered as consisting of “retirement units” and “minor items of property”. A retirement unit is the overall unit of property while the minor items of property are the associated parts or items which compose a retirement unit. Examples of retirement units include air-conditioning systems, bridges, elevators, and cars. The regulatory rules determine which expenditures at Florida Power's electric plants are capitalized and which expenditures are expensed for regulatory accounting purposes. Expenditures for the addition or replacement of a retirement unit are required to be capitalized, while the replacement of a minor item of property is generally deducted as a repair expense.2 Florida Power, as a regulated electric utility, is required to follow regulatory accounting for financial reporting purposes.
The FERC publishes a Uniform System of Accounts (USOA) which contains a standard set of accounts, rules, and regulations. Florida Power, as a major electric utility, is required to follow the USOA. The FPSC also requires Florida Power to follow the USOA. For regulatory accounting purposes, the FERC also publishes a list of Units of Property for Use in Accounting for Additions and Retirements of Electric Plant (FERC list), which is separate from the USOA. The units of property identified in the list are referred to as retirement units. The FERC list of retirement units may be expanded by any utility without other authorization by the FERC, but no retirement unit may be larger in size than those identified in the FERC list. The FERC list may not be condensed, but a subdivision or addition of other units is permitted.
The FPSC authorizes an expanded list of retirement units (FPSC list) beyond those prescribed by the FERC. The FPSC has the discretion to authorize a list of retirement units in which the retirement units are larger in size than the corresponding FERC retirement units. Florida Power could add retirement units to the FPSC list or expand the size of existing retirement units, but it had to notify the FPSC semiannually of these changes. Increasing the size of retirement units would increase the amount of costs charged to expense, while decreasing the size of retirement units would increase the amount of capitalized costs.
During the years in issue, petitioner utilized the FPSC requirements for regulatory accounting purposes. Florida Power made more than 450 changes between 1988 and 1992 to the FPSC list of retirement units and semiannually notified the FPSC of the changes. However, the retirement units used by Florida Power for FPSC purposes did not exceed the limits for retirement units as prescribed by the FERC. Thus, Florida Power's utilization of the FPSC requirements in defining retirement units automatically conformed with the FERC regulatory accounting requirements.3
During the years in issue, Florida Power incurred substantial costs related to its electric plants. The expenditures for these costs were recorded as either capital expenditures or repair expenses for regulatory accounting and financial reporting purposes. In preparing its tax returns for the years in issue, petitioner used the same characterization of expenditures for tax reporting purposes that Florida Power did for regulatory accounting and financial reporting purposes, except for specific Schedule M–1, Reconciliation of Income (Loss) Per Books With Income Per Return, adjustments.4 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.
During the years in issue, petitioner made Schedule M–1 adjustments on its original tax returns with respect to Florida Power. The Schedules M–1 adjustments for the years 1988 to 1991 reflected petitioner's election to apply the percentage repair allowance (PRA), a specific tax provision allowing petitioner to deduct as repair expenses a set percentage of expenditures for the repair, maintenance, rehabilitation, or improvement of certain property. See sec. 1.167(a)–11(d)(2), Income Tax Regs.5 The Schedule M–1 adjustment for 1992 was for a storm reserve and related to damages caused by Hurricane Andrew.6 Other than the variations for the PRA and storm reserve, petitioner used the same characterizations of expenditures for tax purposes that Florida Power did for regulatory accounting and financial reporting purposes.
For the taxable year 1992, petitioner filed two amended returns with claims related to the characterization of expenditures associated with Florida Power. In its first amended return, filed in September of 1993, petitioner claimed additional storm expenses of $412,042 and an additional repair expense deduction of approximately $4.7 million for cable injection expenditures. The storm expenses were accepted by respondent and a portion of the claimed repair expense deduction was allowed by respondent. In its second amended return, filed in December of 1993, petitioner claimed an additional repair expense deduction of approximately $21 million related to the same type of expenditures currently in issue. Respondent allowed an additional repair expense deduction for these expenditures in the amount of approximately $11 million. During the audit of the years 1988 to 1992, respondent proposed to capitalize certain expenditures related...
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