                       114 T.C. No. 36



                 UNITED STATES TAX COURT



FLORIDA PROGRESS CORPORATION & SUBSIDIARIES, Petitioner v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



 Docket No. 2961-97.              Filed June 30, 2000.



      U, a public utility filing consolidated Federal
 income tax returns with P, engaged in the retail and
 wholesale distribution of electricity and related
 services. Federal income tax rates were reduced in
 1986 pursuant to the Tax Reform Act of 1986, Pub. L.
 99-514, sec. 821, 100 Stat. 2372, creating an excess in
 deferred Federal income tax collected from customers of
 U. U was required to adjust utility rates in 1987 and
 1988 to compensate for this overcollection.

      U was allowed to collect funds equal to its
 projected fuel and energy conservation costs. Pursuant
 to regulatory law, monthly collections remained fixed
 over a 6-month recovery period in order to decrease the
 volatility of customers’ bills.

      1. Held, U’s rate reductions from 1987 through
 1990 to compensate for excess deferred Federal income
 tax are not deductible business expenses within the
                                 - 2 -


       meaning of sec. 1341, I.R.C., and, therefore, P is not
       entitled to the beneficial treatment of sec. 1341.

            2. Held, further, overcollections for fuel and
       energy conservation costs are not income to P under
       sec. 61 because U acquired funds subject to an
       unconditional obligation to repay.



       David E. Jacobson and Richard P. Swanson, for petitioner.

       James F. Kearney, for respondent.

                                OPINION

       COHEN, Judge:   Respondent determined deficiencies in

petitioner’s consolidated Federal income tax for 1986, 1987, and

1988 in the amounts of $1,356,802, $1,321,896, and $7,099,160,

respectively.

       After concessions by the parties, the issues for decision

are:    (1) Whether one of petitioner’s subsidiaries is entitled to

compute its tax liability for 1987 and 1988 pursuant to section

1341 and (2) whether funds overcollected pursuant to fuel and

energy conservation cost recovery rates constitute income under

section 61.

       Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.
                                - 3 -




                             Background

     The parties submitted this case fully stipulated pursuant to

Rule 122.    The stipulated facts are incorporated by this

reference.

     Florida Progress Corporation (petitioner) is a corporation

organized and existing under the laws of the State of Florida.

At the time of the filing of the petition, petitioner’s principal

place of business was located in St. Petersburg, Florida.

     Petitioner operates Florida Power Corporation (Florida

Power), a public utility that provides electricity service to

approximately 1.3 million retail customers over 20,000 square

miles of central and northern Florida.      Florida Power also

provides wholesale electricity to other electricity providers.

Petitioner and its subsidiaries, including Florida Power, filed

consolidated Federal income tax returns, reported income on a

calendar year, and used the accrual method of accounting during

all of the years in issue.

     Florida Power is subject to the rules and regulations of

both the Florida Public Service Commission (FPSC) and the Federal

Energy Regulatory Commission (FERC).      The FPSC regulates the

rates that Florida Power may charge its retail customers, whereas

the FERC regulates the rates that Florida Power may charge its

wholesale customers.    Both the FPSC and the FERC allow Florida

Power to charge its customers a rate for electricity calculated
                               - 4 -


from two components, the estimated costs of providing future

services and an approved rate of return on its invested capital.

The projected amount of Federal income tax that Florida Power

will pay is a component of the estimated costs of providing

future services.

     Excess Deferred Federal Income Tax

     The Federal income tax expense that Florida Power uses in

determining its costs of providing future services for rate-

making purposes is generally different from the Federal income

tax expense that it currently owes to the Government.    This

difference is attributable to timing differences in recognition

of items of income and expense.   For example, the FPSC and the

FERC allow Florida Power to use straight-line depreciation for

rate-making purposes, while accelerated depreciation is used for

determining current taxable income.    In an earlier year when

accelerated depreciation is greater than straight-line

depreciation, this timing difference causes a utility to collect

a higher Federal income tax component for rate-making purposes

than the income taxes currently owed to the Government for that

year.   This excess of the estimated Federal income tax expense is

referred to as “deferred Federal income tax expense”.    In a

subsequent year when the timing differences reverse, the income

tax component that the utility charges yields collections that

are less than the Federal income taxes owed by the utility.      The
                                - 5 -


utility uses the amounts that it overcollects in earlier years to

pay the taxes owed in later years.

     Both the FPSC and the FERC require the establishment and

maintenance of deferred income tax accounts that represent the

net cumulative amount of Federal income tax expected to be paid

in future years.    If the income tax rate remains constant, the

deferred income tax account will zero out once the timing

differences between rate-making income and taxable income expire.

     Customers of Florida Power receive the economic benefit of

all deferred income taxes for as long as they are held by Florida

Power.   The FERC treats deferred income tax as a reduction to the

capital rate base used to calculate the approved rate of return

on Florida Power’s invested capital.    The FPSC treats deferred

income tax as zero cost capital, meaning that deferred income tax

is used to fund services for the benefit of the ratepayers and no

return is collected because it was the ratepayers who supplied

the capital.   Customers get the resulting economic benefit in

reduced rates.

     From 1975 through 1986, Florida Power collected revenues

based on a 46-percent Federal income tax rate and increased its

deferred income tax account by the amount of tax related to net

income accrued for rate-making purposes over the amount accrued

for tax purposes.   However, the Tax Reform Act of 1986 (TRA),

Pub. L. 99-514, sec. 821, 100 Stat. 289, effective for 1987 and
                               - 6 -


later years, lowered the maximum Federal corporate income tax

rates to 39.95 percent in 1987 and 34 percent in 1988.    As a

result, Florida Power’s accumulated deferred income tax balance

on December 31, 1986, exceeded the amount of Federal income tax

that Florida Power would be expected to pay to the Government in

later years.   As of December 31, 1986, all deferred Federal

income tax expense collected by Florida Power from its retail

customers in years prior to 1975 had been completely reversed.

     Both the FPSC and the FERC reserve the power to order

refunds of excess amounts collected for deferred income taxes.

However, TRA section 203(e), 100 Stat. 2146, provides that the

normalization provisions of sections 167 and 168 of the Internal

Revenue Code would be violated if a utility were to reduce its

excess deferred income tax reserve more rapidly than as provided

under the average rate assumption method (ARAM).    TRA section

203(e) applies to excess deferred income taxes attributable to

timing differences related to depreciation and described in

sections 167(l) and 168(e)(3) of the Internal Revenue Code

(protected excess deferred taxes).     Under ARAM, protected excess

deferred income taxes can be reversed only as the timing

differences that created them reverse.

     In addition to protected excess deferred taxes, Florida

Power had accumulated excess amounts of deferred income tax for

other timing differences not subject to TRA section 203(e)
                                - 7 -


(unprotected excess deferred taxes).    Examples of other timing

differences, which created unprotected excess deferred taxes,

include deductible State and local tax, certain pension costs,

and research and development costs.     These costs were deducted

for Federal income tax purposes and capitalized for rate-making

purposes.

     For 1987, the FPSC ordered Florida Power, pursuant to Fla.

Admin. Code Ann. r. 25-14.05 (1982) (Fla. Rule 14.05), to return

one-fifth of its total excess deferred income tax to its retail

customers.   Fla. Rule 14.05 generally provided that excess

deferred income tax be returned to customers over a period of 5

years.   The return amounted to a refund of $2,186,000 of

unprotected excess deferred tax and $874,000 of protected excess

deferred tax.   The refund was made to retail customers in the

form of 12 monthly credits on customers’ electric bills under the

heading “1987 Monthly Rate Reduction”.

     Florida Power also entered into a settlement agreement with

its wholesale customers for a return of excess deferred income

tax in 1987.    Under the terms of settlement and pursuant to FERC

regulation, Florida Power agreed to refund $157,000 to its

wholesale customers from its unprotected excess deferred tax and

$63,000 from its protected excess deferred tax.    The settlement

agreement was made effective as of January 1, 1987, but, because

the agreement was not finalized until October 9, 1987, credits
                                - 8 -


that wholesale customers were entitled to receive from January

through October were not reflected on those months’ bills.     To

compensate wholesale customers for credits they did not receive,

checks were issued to each wholesale customer.    The wholesale

customers received credits on their November and December bills.

       On March 2, 1987, Occidental Chemical Corporation, Florida

Power’s largest retail customer, filed a complaint with the FPSC

alleging that Florida Power’s rates should be reduced further in

1988.    Fla. Rule 14.05 was repealed on November 10, 1987, because

the 5-year refund period violated the ARAM method prescribed by

TRA.    On January 4, 1988, the FPSC approved a settlement reached

by the parties in which Florida Power agreed to refund

$18,500,000, the remainder of unprotected excess deferred tax

owed to retail customers, and $2,153,000 of protected excess

deferred tax to Florida Power’s retail customers according to

ARAM.    The refund was made in the form of 12 monthly credits on

customers’ electric bills during 1988 under the heading “1988

Monthly Rate Reduction”.

       In 1988, Florida Power also entered into a settlement

agreement with its wholesale customers to refund excess deferred

income tax.    Under the terms of the 1988 settlement, Florida

Power agreed to refund $1,225,000, the remainder of the

unprotected excess deferred tax owed to wholesale customers, and

$155,000 from its protected excess deferred tax according to
                                - 9 -


ARAM.    The settlement agreement was made effective as of

January 1, 1988, but, because the agreement was not finalized

until August 30, 1988, credits that wholesale customers were

entitled to receive from January through August were not

reflected on those months’ bills.    To compensate wholesale

customers for credits they did not receive, checks were issued to

each wholesale customer.    The wholesale customers received

credits on their September, October, November, and December

bills.

     No interest component was ever included with any refund.

Florida Power did not take a deduction for the credits and refund

checks.    Instead, the credits and refund checks were netted

against taxable revenues for 1987 and 1988, thereby lowering

Florida Power’s gross income in both years.    The amount of refund

that was returned to a particular retail customer was based on

the projected amount of electricity to be provided to that

customer during the refund period and was not determined by the

amount of excess deferred income tax paid, if any, by a

particular customer between 1975 and 1986.    In addition, many

customers who paid excess deferred income tax between 1975 and

1986 did not receive any refund because they left Florida Power’s

service area, died, or otherwise terminated their accounts.
                              - 10 -


     Respondent has denied Florida Power the right to relief

under section 1341 with respect to the FPSC and FERC 1987 and

1988 returns of excess deferred Federal income tax.

     Fuel and Energy Conservation Costs

     Both the FPSC and FERC allow Florida Power to charge its

customers for its actual, necessary, and prudently incurred fuel

costs.   Florida Power uses enriched uranium, coal, natural gas,

and oil as fuel to generate electricity.    The FPSC also allows

Florida Power to charge its customers for reasonable and prudent

energy conservation costs.   Florida Power is required by the FPSC

to develop plans for increasing efficiency and decreasing energy

consumption within its service area.    Reducing the growth rate of

electricity demand benefits not only the individual customer, who

reduces his demand, but also all other customers on the system,

who realize the immediate benefit of reduced fuel costs and the

long-term benefit of deferring the need for additional generating

capacity.

     Fuel costs are recovered from customers through fuel rates

set by the FPSC or FERC, which are stated separately on

customers’ bills.   Energy conservation costs are recovered

through rates set by the FPSC only.    Florida Power is not

permitted to mark up or otherwise earn a profit on amounts it

charges its customers for fuel or energy conservation costs.
                              - 11 -


     In order to calculate fuel and energy conservation rates,

Florida Power must provide the FPSC and FERC with data that

estimate fuel costs, energy conservation costs, and projected

sales over a 6-month recovery period.    Recovery periods run from

April through September and October through March.   The agencies

calculate a fuel and energy conservation cost per kilowatt hour

of electricity consumed that remains level over the entire

period.   The FPSC and FERC have determined that level pricing

over a 6-month period is beneficial to customers because it

reduces the volatility of customers’ monthly bills caused by

fluctuating fuel prices and random energy conservation

expenditures.

     Because the rates approved by the regulatory agencies are

based on estimates, the amount billed by Florida Power for fuel

or energy conservation costs in a given month may be more or less

than the costs actually incurred in that month.   However, an over

or underrecovery at the close of a given month may be increased

or decreased by over or underrecoveries occurring in a subsequent

month during the same recovery period.   Therefore, any

overrecovery balance as of December 31 of any taxable year could

be reduced or eliminated as a result of underrecoveries occurring

during January, February, or March of the following year but same

rate period.
                              - 12 -


     If over and underrecoveries for retail fuel and energy

conservation rates do not cancel during a recovery period, the

FPSC allows for a “true-up” adjustment during the succeeding two

recovery periods.   The FERC allows for a true-up rate adjustment

for wholesale fuel costs during the single succeeding recovery

period.   Both the FPSC and FERC require that overrecoveries be

returned, and underrecoveries be collected, with interest.

     When a customer receives and pays a bill rendered by Florida

Power, the bill shows that the portions relating to fuel and

energy conservation costs are based on estimates, and, when the

estimate is compared to the actual cost of fuel, the customer

knows he will be required either to pay more or he will be

entitled to a setoff on a future electricity bill.   However, the

customer does not know the amount of future true-up involved or

whether it will result in an additional payment by the customer

or an amount received from Florida Power.   Funds collected from

customers for fuel and energy conservation costs are not

segregated in separate bank accounts nor held in trust by Florida

Power.

     At the end of 1986 and 1988, Florida Power had combined

retail and wholesale fuel cost overrecoveries of $11,833,183 and

$31,915,284, respectively.   At the end of 1987, Florida Power had

a combined fuel cost underrecovery of $25,236,199.   In 1986,

1987, and 1988, Florida Power had energy conservation cost
                                - 13 -


overrecoveries of $2,419,002, $509,206, and $1,141,079,

respectively.   Petitioner included the overrecoveries in income

and deducted the underrecovery on its consolidated Federal income

tax returns for these years.    Respondent has denied petitioner’s

request to exclude the overrecoveries from gross income.

                              Discussion

Application of Section 1341

     Petitioner argues that it is entitled to section 1341

treatment for the amount by which Florida Power reduced utility

rates in 1987 and 1988 to compensate for excess deferred Federal

income taxes.   Section 1341 provides in pertinent part:

          SEC. 1341(a).   In General.--If–-

               (1) an item was included in gross income for
          a prior taxable year (or years) because it
          appeared that the taxpayer had an unrestricted
          right to such item;

               (2) a deduction is allowable for the taxable
          year because it was established after the close of
          such prior taxable year (or years) that the
          taxpayer did not have an unrestricted right to
          such item or to a portion of such item; and

               (3) the amount of such deduction exceeds
          $3,000,

     then the tax imposed by this chapter for the taxable
     year shall be the lesser of the following:

               (4) the tax for the taxable year computed
          with such deduction; or

                (5) an amount equal to–-
                              - 14 -


                    (A) the tax for the taxable year
               computed without such deduction, minus

                    (B) the decrease in tax under this
               chapter * * * for the prior taxable year (or
               years) which would result solely from the
               exclusion of such item (or portion thereof)
               from gross income for such prior taxable year
               (or years).

              *     *     *      *     *    *     *

          (b) Special Rules.--

              *     *     *      *     *    *     *

               (2) Subsection (a) does not apply to any
          deduction allowable with respect to an item which
          was included in gross income by reason of the sale
          or other disposition of stock in trade of the
          taxpayer (or other property of a kind which would
          properly have been included in the inventory of
          the taxpayer if on hand at the close of the prior
          taxable year) or property held by the taxpayer
          primarily for sale to customers in the ordinary
          course of his trade or business. This paragraph
          shall not apply if the deduction arises out of
          refunds or repayments with respect to rates made
          by a regulated public utility * * * if such
          refunds or repayments are required to be made by
          the Government, political subdivision, agency, or
          instrumentality referred to in such section or by
          an order of a court, or are made in settlement of
          litigation or under threat of imminence of
          litigation.

     Petitioner’s argument is essentially the same as the

argument raised by the taxpayer in MidAmerican Energy Co. v.

Commissioner, 114 T.C. ___ (2000), filed this date, and we find

no reason to reach a different conclusion in this case.     In

MidAmerican Energy Co., a taxpayer-utility held excess deferred

Federal income tax after Federal income tax rates were reduced in
                               - 15 -


1986 pursuant to TRA.   The taxpayer was forced by regulatory law

to reduce its rates in subsequent years to offset the excess

deferred Federal income tax.

     A deductible expense is required by section 1341(a)(2) to

qualify for relief under the statute.   This Court held that the

taxpayer’s method of decreasing its deferred Federal income tax

account resembled a reduction in rates rather than a deductible

expense.   Factors that led to this Court’s conclusion were:

First, the taxpayer had returned excess deferred income tax to

customer classes based upon current energy consumption, not upon

amounts each individual customer actually overpaid during the

years of overcollection; second, no interest component was

included with the refunds; and, third, the taxpayer set off the

amount to be refunded against future amounts owed for goods and

services on customers’ bills, rather than actually returning

money to customers.   This Court decided that the taxpayer “was

not repaying its customers the excess deferred Federal income tax

that it collected in prior years.   Rather, the rate reductions

served only to reduce income in future years and did not directly

compensate * * * [the taxpayer’s] customers for prior

overcollection.”   Id. at ___ (slip op. at 26).   Because these

same factors are present in the case at hand, we conclude that

Florida Power’s return of excess deferred Federal income tax

resembles a reduction in rates rather than a deductible expense.
                                - 16 -


     Although petitioner argues that Florida Power paid a form of

constructive interest on deferred income tax because both the

FPSC and the FERC calculated allowable rates using formulas that

penalized Florida Power for deferred income tax, these rate

formulas were used even before TRA triggered the liability to

return excess deferred income tax.       Therefore, no interest became

payable upon the formation of the obligation to return excess

deferred income tax, which would have suggested that a liability

had arisen at that point in time.

     Our holding also applies to the portion of returns made to

wholesale customers by check.    These returns were carried out by

check only because they represented funds that should have been

refunded to customers under FERC regulations in previous months.

The refund should have been returned to wholesale customers

starting 10 months earlier in 1987 and 8 months earlier in 1988.

Had Florida Power made these returns in the time required by FERC

regulations, they would have been carried out by setoff on

customers’ bills.   Combined with the other characteristics of the

refunds, this characteristic makes the returns by check resemble

a reduction in rates rather than a deductible expense.

     Petitioner also claims that section 1341(b)(2) and section

1.1341-1(f)(2)(i), Income Tax Regs., provide that utility refunds

shall be eligible for section 1341 treatment.      However, the

language of section 1341(b)(2) that refers to utility refunds and
                                - 17 -


section 1.1341-1(f)(2)(i), Income Tax Regs., does nothing more

than create an exception to the exclusion for the sale of

inventory items, also found in section 1341(b)(2).    Therefore,

although a public utility will not be excluded from the benefits

of section 1341 because its refund stemmed from a sale of

property characterized as inventory, it still must satisfy all

the requirements of section 1341(a) before it is eligible for

relief under the statute.    Because the refunds by Florida Power

do not meet the deduction requirement, petitioner is not eligible

for section 1341 relief.

Inclusion of Overrecovered Costs in Income

     The second issue addresses the proper tax treatment of a

portion of Florida Power’s receipts constituting an overrecovery

of fuel and energy conservation costs.

     Respondent argues that the claim of right doctrine applies

to require inclusion of overrecoveries in income under section

61(a).   According to respondent’s view, petitioner would be

entitled to a deduction in a subsequent year if and when the

overrecoveries are actually refunded to customers.    Respondent

contends that overrecoveries are income because the obligation to

refund was contingent on no underrecoveries arising in the later

months of the recovery period that would reduce or eliminate the

amount to be refunded.     Respondent claims that one should look to
                                - 18 -


the end of a recovery period to determine whether a refund is

required.

     Petitioner argues that such overrecoveries are not

includable in income under section 61(a) because the obligation

to repay, imposed by regulatory law, was unconditional.

According to petitioner’s view, Florida Power is required to

refund an overrecovery from any given month in a subsequent month

of the same recovery period by setoff or according to the true-up

adjustment imposed by regulatory law over subsequent recovery

periods.    Petitioner claims one should look at a monthly

collection to determine whether a refund is required.

     Section 61(a) defines gross income as “all income from

whatever source derived.”     Congress enacted this text intending

to use the full measure of its taxing power.      See Helvering v.

Clifford, 309 U.S. 331, 334 (1940).      The definition of gross

income is construed broadly to reach any accession to wealth

realized by a taxpayer over which the taxpayer has “complete

dominion”.     Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431

(1955).     “In determining whether a taxpayer enjoys ‘complete

dominion’, * * * The key is whether the taxpayer has some

guarantee that he will be allowed to keep the money.”

Indianapolis Power & Light Co. v. Commissioner, 493 U.S. 203, 210

(1990).
                              - 19 -


     A claim of right exists when property or funds are received

and treated by a taxpayer as belonging to him.   See Healy v.

Commissioner, 345 U.S. 278, 282 (1953).   Income received under a

claim of right is taxable in the year of receipt even though the

taxpayer may be required to return it at a later time.     See North

Am. Oil Consol. v. Burnet, 286 U.S. 417, 424 (1932).     If, in a

subsequent year, the claim to the funds or property is determined

to be invalid, the taxpayer would be entitled to a deduction in

the year of repayment.   However, the amount of tax due and

reported in the year of receipt is unaffected by the return of

property or funds.   See United States v. Skelly Oil Co., 394 U.S.

678, 680-681 (1969).   Property or funds are not received under a

claim of right when there is a substantial restriction on its

disposition or use, or when there is a fixed obligation to return

the property or funds received.   See Indianapolis Power & Light

Co., supra at 209; Hope v. Commissioner, 55 T.C. 1020, 1030

(1971), affd. 471 F.2d 738 (3d Cir. 1973).

     In Indianapolis Power & Light Co., the Supreme Court dealt

with the issue of whether deposits, paid by customers to assure

the taxpayer of payment for future electricity, were required to

be included in income.   The deposits were received by the

taxpayer subject to an express obligation to repay either at the

time service was terminated or at the time a customer established

good credit.   So long as a customer fulfilled his legal
                                - 20 -


obligation to make timely payments, the deposit ultimately was

refunded, and both the timing and method of refund were within

the control of the customer.    The customer could demand that the

taxpayer return the deposit payment by check or by setoff on the

customer’s next utility bill.

     The Court held that the test for whether deposit payments

paid by customers constitute income when received by the taxpayer

depends upon the rights and obligations of the parties at the

time the payments are made.    See id. at 211.   The Court decided

that, because it was within the customer’s domain to prevent a

forfeiture of a deposit payment and because the customer rather

than the taxpayer determined how and when a deposit payment was

returned, the payments in question did not constitute income to

the taxpayer.   Where the time and manner of repayment is within

the control of the taxpayer, the payments would constitute

income.   See Milenbach v. Commissioner, 106 T.C. 184, 197 (1996).

     The return of overrecoveries of fuel and energy conservation

costs are not within the control of Florida Power.    The 6-month

recovery period, price setting, and true-up adjustment are all

set by the FPSC and FERC, which implemented the pricing schemes

to reduce the volatility of customers’ bills.    Florida Power is

required by regulatory law to overcollect for fuel and energy

conservation costs in certain months and to return those funds by

setoff on customers’ bills in the later months of the recovery
                              - 21 -


period in order to create level pricing.   Any remaining

overrecoveries existing at the end of the recovery period,

because of inaccuracies in estimating its projected costs, are

returned to customers pursuant to the true-up adjustment required

by the FPSC and FERC.   Florida Power cannot change or alter the

time or method of refunding the overrecoveries.    Because the time

and method of refunding overrecoveries is controlled by the FPSC

and FERC rather than by Florida Power, Florida Power does not

have complete dominion over the overrecoveries and is not

required to recognize them as income when received.

     Respondent argues that Indianapolis Power & Light Co. does

not apply to this case because the Supreme Court was addressing

only the question of whether certain payments by customers were

advanced payments for services or were deposits.   Respondent

maintains that, in this case, the overrecoveries were paid to

Florida Power as part of the compensation it receives for

providing electricity service rather than in the form of a

deposit, and, therefore, the test for income announced in

Indianapolis Power & Light Co. was not intended by the Supreme

Court to apply to overrecoveries.

     We reject respondent’s argument that the holding in

Indianapolis Power & Light Co. should be construed so narrowly.

Respondent is essentially making the same arguments in this case

regarding overrecoveries that were rejected by the Supreme Court
                              - 22 -


in Indianapolis Power & Light Co. with regard to deposits.

Respondent argues that the overrecoveries should be included in

income under section 61 because the overrecoveries are property

of Florida Power under a claim of right and subject to a

conditional obligation to repay.    The conditional obligation to

repay vests only if an offsetting underrecovery does not occur

before the end of the 6-month recovery period.    However, the true

economic substance of Florida Power’s obligation is that, at the

end of the month, Florida Power is not entitled to keep the

amount held as an overrecovery, and it must return that amount

according to regulatory law either by setoff during the remainder

of the recovery period or by the true-up adjustment.

     Our decision is consistent with Houston Indus. v. United

States, 125 F.3d 1442, 1444 (Fed. Cir. 1997).    In Houston Indus.,

the Court of Appeals held that overrecoveries of fuel costs are

not required to be included in income when the overrecoveries are

part of a plan to create level pricing over a 12-month recovery

period.   A taxpayer-utility collected funds from its customers

equal to the fuel costs it expected to incur.    The collections

were based on estimates and were followed by a reconciliation

procedure to account for any over or underrecoveries.   The

governing regulatory agencies required the taxpayer to pay

interest on any overrecoveries.    The taxpayer argued that it was

not required to report in gross income overrecoveries for fuel
                                - 23 -


costs that were in the taxpayer’s possession at the close of the

year.     Interpreting Indianapolis Power & Light Co., the Court of

Appeals agreed with the taxpayer.

        Respondent claims that the outcome of this case should,

instead, be controlled by Brown v. Helvering, 291 U.S. 193

(1934).     The taxpayer in Brown was an insurance agent who

received a commission from premiums paid on insurance policies.

The insurance policies included a right of cancellation, which,

when exercised, required the insurance company to refund the

premiums paid.     In the event of cancellation, the taxpayer was

required to refund to the insurance company a portion of the

commission he had received with respect to a canceled policy.       On

his books, the taxpayer recorded an estimate of his future

liability to refund commissions and sought to exclude the

estimate from gross income.     The Court rejected the argument of

the taxpayer stating that “the mere fact that some portion of

* * * [the commissions] might have to be refunded in some future

year in the event of cancellation or reinsurance did not affect

its quality as income.”     Id. at 199.

        The situation of Florida Power is distinguishable from that

of the insurance agent in Brown.     Brown dealt with contingent

liabilities that may or may not have vested in future years.       In

making his estimates, the taxpayer had no idea which policies, if

any, might cancel creating a liability on his part, nor did he
                              - 24 -


know the amount of his liability at the end of the year.   Florida

Power, however, is subject to a fixed and certain liability to

refund overrecoveries, and those overrecoveries are determinable

immediately after receipt of payment by subtracting its

collections for a given month by its costs actually incurred.

     Our holding is also distinguishable from our opinions in

Southwestern Energy Co. v. Commissioner, 100 T.C. 500 (1993), and

Continental Ill. Corp. v. Commissioner, T.C. Memo. 1989-636,

affd. 998 F.2d 513 (7th Cir. 1993).    In Southwestern Energy Co.,

the taxpayer collected monthly utility fees that were based on

the costs that it expected to incur for purchasing gas in the

subsequent month.   Because the pricing was based on estimates,

over or undercollections occurred at the end of every month.     At

the end of the year, the taxpayer was bound by regulatory law to

calculate the net overcollection for the year and return that

amount during the following year.   Using this collection method,

the fuel cost charged to customers by the taxpayer fluctuated

each month.   The purpose of the monthly gas collections was to

allow the taxpayer to recoup its cost of gas purchased and not to

create level pricing.   This Court held that the obligation to

return a net overcollection during the next year was not an

immediately deductible expense.

     In Continental Ill. Corp., the taxpayer made fixed-term

loans with floating interest rates to corporate borrowers.
                              - 25 -


However, the loan agreements provided that, if the total amount

of interest paid by a borrower over the life of the loan exceeded

a preset fixed-rate cap, the taxpayer would refund the excess.

The taxpayer included in income the amount of interest collected

with each monthly payment only to the extent it did not exceed

the fixed-rate cap.   Respondent argued, and this Court agreed,

that the excess collections should be included in gross income

because a contingent obligation to repay does not constitute a

restriction on use sufficient to prevent their being classified

as income.

     The excess collections in Southwestern Energy Co. and

Continental Ill. Corp. differ from the excess fuel and energy

conservation costs collected by Florida Power in three

significant respects.   First, Florida Power is required to pay

interest on its overrecoveries, whereas, in Southwestern Energy

Co. and Continental Ill. Corp., the taxpayer did not include an

interest component in its refunds of excess collections.   Second,

Florida Power, burdened by additional accounting and

administrative responsibilities, derives no benefit from the

regulatory imposed recovery system.    Florida Power is forced by

the FPSC and FERC to overrecover its costs and then give refunds

in later months in order to reduce the volatility of customers’

monthly bills caused by fluctuating fuel prices and random energy

conservation expenditures.   The regulatory recovery method is
                                - 26 -


designed to spread the costs of the expenditures over the 6-month

recovery period for the sole benefit of customers.     By contrast,

the recovery methods in Southwestern Energy Co. and Continental

Ill. Corp. benefited only the taxpayer and not the customer.

Third, in a subsequent month, if an undercollection occurred in

Southwestern Energy Co., or if interest dipped below the

fixed-rate cap in Continental Ill. Corp., the taxpayer did not

immediately return overcollections from a prior month by setoff.

Thus, no refund occurred until the following year in Southwestern

Energy Co. or after the end of the loan period in Continental

Ill. Corp.     In any event, no question was raised or considered

whether overrecoveries constituted gross income in the year of

receipt.

     The final argument of respondent is that, by not including

overrecoveries in income, petitioner has improperly changed its

method of accounting with respect to a material item without the

consent of the Secretary.    Consent is required by section 446(e),

which reads:

          SEC. 446(e). Requirement Respecting Change of
     Accounting Method.--Except as otherwise expressly
     provided in this chapter, a taxpayer who changes the
     method of accounting on the basis of which he regularly
     computes his income in keeping his books shall, before
     computing his taxable income under the new method,
     secure the consent of the Secretary.

     “[C]hange in method of accounting” includes a “change in the

overall plan of accounting for gross income or deductions or a
                                - 27 -


change in the treatment of any material item used in such overall

plan.”   Sec. 1.446-1(e)(2)(ii)(a), Income Tax Regs.    A material

item is defined as “any item which involves the proper time for

the inclusion of the item in income or the taking of a

deduction.”   Sec. 1.446-1(e)(2)(ii)(a), Income Tax Regs.    When an

accounting practice does nothing more than postpone the reporting

of income, rather than permanently avoiding the reporting of

income over the taxpayer’s lifetime, it involves the proper time

for reporting income.    See Wayne Bolt & Nut Co. v. Commissioner,

93 T.C. 500, 510 (1989).     “[C]hange in method of accounting does

not include adjustment of any item of income or deduction which

does not involve the proper time for the inclusion of the item of

income or the taking of a deduction.”     Sec. 1.446-1(e)(2)(ii)(b),

Income Tax Regs.

     In Saline Sewer Co. v. Commissioner, T.C. Memo. 1992-236,

this Court held that, for purposes of section 446, a question of

whether collections should be reported in income is different

from a question as to the proper time when collections should be

reported in income.     If a taxpayer seeks to change his prior

reporting position regarding whether a particular item is income

or not, a taxpayer is not required to seek the Secretary’s

permission before filing.     Thus, section 446(e) is inapplicable

to the reporting of overrecoveries by Florida Power during the

years in issue.
                             - 28 -


     We have considered all remaining arguments made by both

parties for a result contrary to those expressed herein, and, to

the extent not discussed above, they are irrelevant or without

merit.

     To reflect the foregoing and the concessions of the parties,

                                   Decision will be entered

                              under Rule 155.
