Adherence to utility regulations is an accounting method.

• Author: Sair, Edward A.

In FPL Group, Inc., 115 TC 554 (2000), the Tax Court held that an electric utility had chosen an accounting method when it characterized capital expenditures and repair expenses using the accounting method required for regulatory purposes. Thus, the company's attempt to recharacterize those items without the Service's consent was impermissible.

The decision highlights once again that a taxpayer's decision on how to report an expense can be just as important as the transaction itself, and can even supersede the transaction's true nature.

Background

Florida Power & Light Co., a subsidiary of FPL Group, adhered to regulatory rules and guidelines for recording capital expenditures and repair expenses, not only for regulatory accounting and financial reporting purposes, but also for Federal tax purposes. (According to the Tax Court, regulatory rules required Florida Power to adhere to regulatory accounting for financial-reporting purposes.)

After the IRS determined deficiencies for 1988-1992, FPL argued that it was entitled to a greater deduction for repair expenses, some of which it had improperly characterized as capital expenditures on returns. It deducted repairs to the extent allowed under Regs. Sec. 1.162-4, and used the amount of repair expenses determined for regulatory accounting purposes only as a reasonable approximation of that allowed for tax purposes, intending to make adjustments later.

Tax Court

In FPL, the court followed Southern Pac. Transp. Co., 75 TC 497 (1980), a case similar to FPL, involving a taxpayer subject to the Interstate Commerce Commission's (ICC's) regulatory accounting rules on capitalization. The taxpayer had attempted to change from capitalizing expenditures to expensing them; the court held that, even if the expenditures were properly deductible, the change was impermissible, because it involved a question of proper timing and the taxpayer had not obtained the Service's consent. The court in Southern Pac. did not consider whether following the ICC rules was an accounting method for tax purposes.

In FPL, the Tax Court also relied on Wayne Bolt & Nut Co., 93 TC 500 (1989), which held that a taxpayer could not change its consistently used inventory accounting method without the IRS's consent, even though the method used was "flawed."

FPL argued that the inventory case did not apply, because inventories follow separate rules for determining accounting method. The court refused to make that distinction, finding...