                    United States Court of Appeals
                          FOR THE EIGHTH CIRCUIT
                                   ___________

                          Nos. 00-3958/3959/3960/3961
                                  ___________

MidAmerican Energy Company,          *
                                     *
          Appellant,                 *
                                     *
    v.                               * Appeals from the
                                     * United States Tax Court.
                                     *
Commissioner of Internal Revenue,    *
                                     *
          Appellee.                  *
                                ___________

                             Submitted: September 10, 2001

                                 Filed: November 15, 2001
                                  ___________

Before MORRIS SHEPPARD ARNOLD and BRIGHT, Circuit Judges, and KYLE1,
      District Judge
                                     ___________

MORRIS SHEPPARD ARNOLD

       MidAmerican Energy Company, a public utility and retail distributor of
electricity and natural gas, sued the Commissioner of Internal Revenue in 1997,
largely as a result of changes to the Internal Revenue Code. MidAmerican claimed
in that suit that it was being double-taxed at the end of the year because the
Commissioner incorrectly rejected its method of accounting, and that it was entitled

      1
      The Honorable Richard H. Kyle, United States District Judge for the District
of Minnesota, sitting by designation.
to a deduction after state regulators forced it to disgorge "excessive" profits. The Tax
Court rejected both claims. See MidAmerican Energy v. Commissioner, 114 T.C. 570
(2000). We affirm.

                                           I.
       The Tax Court concluded that although MidAmerican's contention that it was
being double-taxed was “essentially an accounting dispute,” 114 T.C. at 577, it was
nonetheless one that the Code resolved. We agree. The 1986 revision of the Code
denied utilities the right to use the so-called "cycle meter-reading" method of
accounting, a method that had allowed them to defer income from the last billing
cycle of a tax year to the next tax year. Under that method, for instance, a utility
could bill for services through December 15, and those charges would be counted as
income for that tax year; charges for the period of December 16-31, however, would
be billed in January and counted as income for that tax year. MidAmerican maintains
that it stopped using this accounting method as of 1987, but the Commissioner
concluded that MidAmerican's new accounting method continued to defer some
income from the last billing cycle of tax years 1987 through 1990.

       The relevant portion of the Code provides that "any income attributable to the
sale or furnishing of utility services to customers shall be included in gross income
not later than the taxable year in which such services are provided to such customers."
26 U.S.C. § 451(f)(1). If services are provided within the last two weeks of
December, then revenues realized from those services must be included as income
within that tax year, even if bills for those services are sent or paid in the following
year.

      MidAmerican notes that its monthly billings to customers include a Purchased
Gas Adjustment ("PGA"), which is designed to pass through to customers any
fluctuations in wholesale gas costs. According to MidAmerican, the PGA does more
than just account for market fluctuations: MidAmerican claims that it makes the

                                          -2-
billing period serve as a "proxy" for an actual calendar month. A customer might be
billed $100 on December 15, for example, and MidAmerican contends that part of
that $100 is intended to cover the company's gas costs for the period of December 16
through December 31. According to MidAmerican, the consumption between
November 16 and December 15 ( multiplied by current wholesale gas prices) is used
to estimate gas costs for the remainder of December; that is, the PGA for
November 16 through December 15 serves as a "proxy" for actual gas costs for the
entire month of December. Variations in the estimated and actual gas costs are later
reconciled in supplemental adjustments to income. MidAmerican argues that under
these circumstances it should not have to include the portion of the January bill
attributable to gas costs for December 16 through December 31 as part of the
preceding year's gross income.

       We think that the issue in this case is relatively straightforward: either part of
the January bill is attributable to gas used the previous December or it is not.
MidAmerican's counsel conceded below that a given month's billing for gas costs is
based on usage from the month before: He told the Tax Court that "those bills that
are rendered during the month of December include a slice of the consumption from
the month of November, it's absolutely true, but they are intended to now pay costs
that are incurred during the month of December, calendar December, December 1
through December 31." Thus the heart of MidAmerican's argument seems to be
intent. MidAmerican intends that costs billed in one period serve as a "proxy" for
costs in a following period.

       The intent of the taxpayer, however, cannot change the relevant facts – either
the bill includes usage from the prior month or it does not. If MidAmerican
multiplies cost per unit by the number of units used between November 16 through
December 15 and issues a bill, the argument that the gas costs in that bill are actually
for gas costs incurred from December 1 through December 31 has no basis in reality.
As we see it, it is simply a fanciful, self-serving description of what is happening.

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MidAmerican concedes that the January bill includes usage from the prior calendar
year, and therefore, we believe, it concedes the entire argument. Under § 451(f)(1),
revenues from that bill that derive from usage that occurred in December constitute
"income attributable to the ... furnishing of utility services" in December and thus
must be included in the prior year.

       MidAmerican responds that it is paying a full year's worth of taxes under its
method, even if that year does not coincide with the calendar year. As
MidAmerican's counsel put it to the Tax Court, "[t]he fact that it's not the exact same
12 months as the calendar year that we file our tax return for simply shouldn't matter."
We believe that this is an argument that should be addressed to Congress. As
currently written, § 451(f)(1) is quite explicit in requiring that income be attributed
to the year in which the service that generated that income is provided.

       MidAmerican notes that its accounting methods are dictated, at least in part,
by state utility regulators. While that may be true, the Supreme Court has recognized
"the vastly different objectives that financial and tax accounting have," and that "any
presumptive equivalency between tax and financial accounting would be
unacceptable." Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 542-43 (1979);
see also Frank Lyon Co. v United States, 435 U.S. 561, 577 (1978). The Code grants
the Internal Revenue Service authority to use its own accounting methods if the
methods used by the taxpayer do not produce an accurate accounting of income. See
26 U.S.C. § 446(b). We conclude that the Commissioner correctly exercised that
authority in requiring MidAmerican to count income from gas used in the final days
of December even though that income did not accrue until the following year.

                                        II.
      When state utility regulators determine rates for MidAmerican, those rates
compensate for the amount that MidAmerican is expected to pay in federal income
tax. When Congress cut the tax rate from 46 percent to 39.95 percent and then to

                                          -4-
34 percent, MidAmerican kept the difference and thus made substantially higher
profits than state regulators had anticipated. MidAmerican argues that because the
state regulators forced it to "refund" the higher-than-anticipated profits to its
customers by lowering its rates, it should be entitled to deduct those "refunds" under
26 U.S.C. § 1341. That section allows a deduction if "an item was included in gross
income for a prior taxable year ... because it appeared that the taxpayer had an
unrestricted right" to it and it was "established after the close of such prior taxable
year ... that the taxpayer did not have an unrestricted right to such item." Id. The
Commissioner counters that state regulators may have, in fact, required MidAmerican
to lower its profits in subsequent years, but that those lowered profits cannot be
deducted under § 1341.

        The Seventh Circuit recently addressed the identical question in WICOR, Inc.
v. United States, 263 F.3d 659 (7th Cir. 2001). In that case, Wisconsin utility
regulators had allowed WICOR, a utility company, to treat anticipated tax liabilities
as a cost of service for purposes of setting utility tariffs. See id. at 661. After tax
rates were lowered, the public service commission required WICOR to lower its
prices to compensate for the higher profits. See id. WICOR argued, as does
MidAmerican, that these mandated lower prices amounted to refunds to its customers
of the difference between the original tax rate and the subsequent lower tax rates, and
that it should be able to deduct these "refunds" from its current taxes under the terms
of § 1341 of the Code. See id. at 662.

      The Seventh Circuit noted that § 1341 applies only if "a deduction is
allowable" for the year in question. WICOR, 263 F.3d at 662 (quoting 26 U.S.C.
1341(a)(2)). In other words, the "item" referred to in § 1341 must qualify for a
deduction under some other portion of the Code. See United States v. Skelly Oil Co.,
394 U.S. 678, 683 (1969). In WICOR, 263 F.3d at 662, the taxpayer argued that in
essence it had made a deductible "refund" to its customers. The Seventh Circuit
concluded, however, that a discount in future profits was not a refund and therefore

                                         -5-
was not deductible. See id. We agree. Section 1341 requires something deductible,
and a reduction in future profits is not a refund, nor is it otherwise deductible.

       Our conclusion also finds support in the Fourth Circuit's holding in Roanoke
Gas Co. v. United States, 977 F.2d 131 (4th Cir. 1992). In that case, Virginia
regulators ordered a prospective rate reduction to compensate for the increased profits
that the utility had earned as a result of a decrease in gas costs. See id. at 135. The
court noted that the rate reduction bore none of the usual attributes of a refund since
there was no attempt to credit the putative overcharges to the persons overcharged,
and the rate reduction was therefore not a deductible expense. See id. at 135-36. The
court concluded "that the obligation to make a future rate adjustment does not
constitute an expense but rather represents a regulation of income." Id. at 133.

        MidAmerican cites Dominion Resources, Inc. v. United States, 219 F.3d 359
(4th Cir. 2000), for the proposition that § 1341 applies when a utility is ordered to
refund excess income attributable to lower-than-expected income taxes. We note that
Dominion Resources can be distinguished because the payments in question there had
all the attributes of a true refund and were not merely a reduction in future revenues:
there was an attempt to match the amount refunded a given customer to the amount
that customer was "overcharged," see id. at 369, and the taxpayer made such refunds
via wire transfers, checks, or one-time credits, see id. at 362. In contrast, we believe
that the regulation of MidAmerican's profits by state regulators does not give rise to
"refunds" as that word is used either commonly or technically, and thus it is not
deductible as such.

       In his brief, the Commissioner criticized Dominion Resources as contrary to
traditional IRS interpretation of § 1341 and argued that the Dominion Resources court
erred by applying § 1341 too liberally. Thus, the IRS continues its tenacious
adherence to its restrictive view of § 1341, arguing that the taxpayer must have had
only an "apparent" right to the income in question but not an "actual" right to it before

                                          -6-
a deduction is allowable. According to the Commissioner's rationale, if a taxpayer
rightfully received title to money in one year but lost that right in a subsequent tax
year (and thus had to refund the money), the taxpayer would not be eligible for a
deduction under § 1341. Instead, the Commissioner argues, the taxpayer must never
have had a right to the income in the first place, but must only have appeared to have
had a right to it at the time. We do not reach that question in the present case but, as
the Seventh Circuit did in WICOR, we note that all the appellate courts that have
addressed it have rejected the Commissioner's argument. See Dominion Resources,
219 F.3d at 363-68, and Van Cleave v. United States, 718 F.2d 193, 196-97 (6th Cir.
1983).

                                        III.
      For the reasons indicated, we affirm the judgment of the Tax Court.

      A true copy.

             Attest:

                CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.




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