                        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
                                 - 2 -

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.
                                 - 3 -

     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
                                - 4 -

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
                               - 5 -

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
                               - 6 -

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
                                - 7 -

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).]
                                - 8 -

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.
                               - 9 -

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
                               - 10 -

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
                              - 11 -

     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
                              - 12 -

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.
                              - 13 -

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.
                                - 14 -

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.
