C C C C O O O O R R R R P P P P O O O O R R R R A T A T A T A T E E E E B B B B U U U U S S S S I I I I N N N N E E E E S S S S S S S S T A T A T A T A X X X X A T A T A T A T I I I I O O O O N N N N M M M M O O O O N N N N T T T T H H H H L Y L Y L Y L Y Tax Accounting BY JAMES E. SALLES In this month’s column: Background FPL Group was a fairly routine change-of-method • The Tax Court addresses when a change in case that boiled down to a dispute about what was the accounting method has occurred in FPL Group taxpayer’s present method of accounting. The taxpay- v. Commissioner . 1 er kept its books in conformity with the overlapping • Revenue Ruling 2001-4 2 addresses the treat- requirements of the Federal Energy Regulatory ment of the costs of periodic aircraft overhauls. Commission (FERC) and the Florida Public Service • Congress repeals the prohibition on accrual Commission (FPSC). One important concern of the taxpayers’ use of the installment method in the regulators was defining the proper “retirement unit” for Installment Tax Correction Act of 2000. 3 plant and equipment. Replacing an entire “retirement • The IRS tweaks its administrative exemption unit” was a capital expenditure, while the cost of repairs from accrual accounting for small taxpayers in or of replacing only some components of a retirement Revenue Procedure 2001-10. 4 unit was expensed. The taxpayer consistently followed • Congress expands the category of “brown- its regulatory accounting in distinguishing between field” cleanup costs eligible for favorable “repairs” and “improvements” on its books, although expensing treatment under Code Section 198. the precise criteria employed varied: with FPSC per- • The Tax Court holds that a “contract for deed” mission, the taxpayer implemented several hundred is sufficient to transfer the tax ownership of real- minor refinements over a five-year period. ty in Keith v. Commissioner . 5 For tax purposes, the taxpayer followed its book REPAIRS VERSUS IMPROVEMENTS accounting — itself something of a moving target, as explained above — with a few specific departures. The A recent Tax Court case holds that a utility attempted taxpayer elected a regulatory safe harbor, left over from an impermissible change of accounting method when it the heyday of the asset depreciation range (ADR) tried to switch from capitalizing certain costs as depreciation regime, that permitted deducting a “per- improvements to deducting them as repairs. The tax- payer in FPL Group, Inc. v. Commissioner 6 is the con- centage repair allowance” based upon the property’s cost. 9 The returns also showed an isolated “schedule solidated group that includes Florida Power & Light Co., which lately has seen its share of tax litigation in gener- M” adjustment reflecting a special reserve for damage al and tax accounting issues in particular. An earlier caused by Hurricane Andrew. Finally, the taxpayer column discussed a case involving its predecessor that claimed some additional deductions for repairs on addressed issues arising from a state-imposed reduc- amended returns for 1992 that were partially allowed by tion in utility rates. 7 The new group’s taxable years 1994 the Internal Revenue Service (IRS). and 1995 are also the subject of a Tax Court petition The issue in FPL Group was whether the change of presenting several issues, including the tax treatment of method rules precluded the taxpayer from arguing that asbestos costs. 8 it should have deducted more, and capitalized less, of these repair-type costs in its taxable years 1988 through 1992. The Tax Court granted partial summary judgment for the IRS, holding that the change would be a change Jim Salles is a member of Caplin & Drysdale in Washington, D.C. in method of accounting. M A R C H 2 0 0 1 31 31 31
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