UNITED STATES TAX COURT



    FPL GROUP, INC. AND SUBSIDIARIES, Petitioner v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 5271-96.                     Filed December 13, 2000.



     F, a regulated electric utility, is a wholly owned
subsidiary of P. F is required to follow prescribed
regulatory rules for regulatory accounting and
financial reporting purposes. In preparing its
consolidated tax returns for the years in issue, P
characterized F’s expenditures by using the same
characterization that F used for regulatory accounting
and financial reporting purposes. In an amended
petition, P sought to recharacterize as repair
expenses, expenditures which it had characterized as
capital expenditures for tax purposes.

     Held: P’s method of accounting for tax reporting
purposes was to characterize the expenditures in issue
consistently with the method that F used for regulatory
accounting and financial reporting purposes. By
seeking to alter the method which it used to
characterize expenditures, P is attempting to change
its method of accounting. P has failed to obtain the
consent of the Secretary to change its method of
                               - 2 -

     accounting under sec. 446(e), I.R.C.; therefore, P is
     not entitled to the claimed expense deductions.



     Robert Thomas Carney, for petitioner.

     Gary F. Walker, Sergio Garcia-Pages, and Robert W. Dillard,

for respondent.



                              OPINION


     RUWE, Judge:   This matter is before the Court on

respondent’s motion for partial summary judgment filed pursuant

to Rule 121.1   The sole issue presented is whether petitioner’s

attempt to recharacterize as repair expenses, expenditures which

it had characterized on its tax returns as capital expenditures

for the taxable years 1988 to 1992, is an impermissible change in

accounting method under section 446(e).

                            Background

     FPL Group, Inc. (petitioner) is a corporation organized and

existing under the laws of the State of Florida with its

principal office located in Juno Beach, Florida.   Florida Power &

Light Co. (Florida Power) is a wholly owned subsidiary of




     1
      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 -

petitioner.   Petitioner filed consolidated returns with Florida

Power during the years in issue.

     On December 28, 1995, respondent issued a notice of

deficiency for the taxable years 1988 through 1992.    In its First

Amended Petition, filed May 13, 1996, petitioner argued for the

first time that respondent erred in failing to allow a deduction

for certain repair expenses related to Florida Power when

determining the deficiency amounts in the notice of deficiency.

Petitioner claimed that it had improperly characterized the

following expenditures related to Florida Power as capital

expenditures and that it should have deducted them as repair

expenses:

                Year                        Amount
                1988                     $35,324,412
                1989                      52,115,791
                1990                      54,746,820
                1991                      56,823,897
                1992                      11,914,614
                  Total                  210,925,534

Petitioner did not file a Form 3115, Application for Change in

Accounting Method, with respondent to request a change in

accounting method for the expenditures at issue.   Respondent did

not raise the change in accounting method issue prior to the

filing of his motion for partial summary judgment.

     Florida Power owns and operates fossil and nuclear electric

generating plants in Florida and also owns interests in coal-

fired electric generating plants in Georgia and Florida, which
                               - 4 -

are operated by other utilities. Florida Power provides public

electric utility services in Florida.    Florida Power is subject

to the regulatory rules of the Federal Energy Regulatory

Commission (FERC) and the Florida Public Service Commission

(FPSC).   The FERC regulates the rates that Florida Power may

charge to its wholesale customers.     The FPSC regulates the rates

that Florida Power may charge to its retail customers.

     For regulatory purposes, property at Florida Power’s

electric generating plants (electric plants) is considered as

consisting of “retirement units” and “minor items of property”.

A retirement unit is the overall unit of property while the minor

items of property are the associated parts or items which compose

a retirement unit.   Examples of retirement units include air-

conditioning systems, bridges, elevators, and cars.    The

regulatory rules determine which expenditures at Florida Power’s

electric plants are capitalized and which expenditures are

expensed for regulatory accounting purposes.    Expenditures for

the addition or replacement of a retirement unit are required to

be capitalized, while the replacement of a minor item of property

is generally deducted as a repair expense.2    Florida Power, as a



     2
      Under regulatory accounting, expenses that are capitalized
are taken into the capital base for ratemaking purposes (i.e.,
they receive an allowed “rate of return” on capital investment).
On the other hand, expenditures deducted as current expenses are
passed on to customers (and, therefore, reimbursed dollar-for-
dollar) in the allowed rates.
                                - 5 -

regulated electric utility, is required to follow regulatory

accounting for financial reporting purposes.

     The FERC publishes a Uniform System of Accounts (USOA) which

contains a standard set of accounts, rules, and regulations.

Florida Power, as a major electric utility, is required to follow

the USOA.   The FPSC also requires Florida Power to follow the

USOA.   For regulatory accounting purposes, the FERC also

publishes a list of Units of Property for Use in Accounting for

Additions and Retirements of Electric Plant (FERC list), which is

separate from the USOA.   The units of property identified in the

list are referred to as retirement units.   The FERC list of

retirement units may be expanded by any utility without other

authorization by the FERC, but no retirement unit may be larger

in size than those identified in the FERC list.    The FERC list

may not be condensed, but a subdivision or addition of other

units is permitted.

     The FPSC authorizes an expanded list of retirement units

(FPSC list) beyond those prescribed by the FERC.    The FPSC has

the discretion to authorize a list of retirement units in which

the retirement units are larger in size than the corresponding

FERC retirement units.    Florida Power could add retirement units

to the FPSC list or expand the size of existing retirement units,

but it had to notify the FPSC semiannually of these changes.

Increasing the size of retirement units would increase the amount
                               - 6 -

of costs charged to expense, while decreasing the size of

retirement units would increase the amount of capitalized costs.

     During the years in issue, petitioner utilized the FPSC

requirements for regulatory accounting purposes.   Florida Power

made more than 450 changes between 1988 and 1992 to the FPSC list

of retirement units and semiannually notified the FPSC of the

changes.   However, the retirement units used by Florida Power for

FPSC purposes did not exceed the limits for retirement units as

prescribed by the FERC.   Thus, Florida Power’s utilization of the

FPSC requirements in defining retirement units automatically

conformed with the FERC regulatory accounting requirements.3


     3
      An example of the aforementioned regulatory concepts
illustrates the accounting principles of the FERC and FPSC.
Suppose that P owns five cars. Each car is defined as a
retirement unit in the FERC list. The wheels, seats, and other
components of the car would be considered minor items of
property. Under the FERC, P could add more cars or replace
existing cars, and the corresponding costs would be capitalized.
The costs of the replacement of the wheels, seats, etc., would
generally be considered as expenditures related to minor items of
property and generally would be expensed. Theoretically, P could
subdivide the car into smaller retirement units, so that the
wheels, seats, etc., would be considered separate retirement
units. This would increase the amount of capitalized costs
because additions or replacements of the wheels, seats, etc.,
would be required to be capitalized under regulatory rules.
However, under the FERC, P is prohibited from increasing the size
of the retirement units; i.e., defining a retirement unit to
include all five cars. The FPSC has the discretion to allow P to
increase the size of the retirement units. This action, if
available to P, might theoretically allow all five cars to be
identified as one retirement unit; thus, the individual cars
might be defined as minor items of property. This would result
in an increase in the size of the retirement unit (from one car
to five cars), and the amount of costs charged to repair expense
                                                   (continued...)
                                - 7 -

     During the years in issue, Florida Power incurred

substantial costs related to its electric plants.   The

expenditures for these costs were recorded as either capital

expenditures or repair expenses for regulatory accounting and

financial reporting purposes.   In preparing its tax returns for

the years in issue, petitioner used the same characterization of

expenditures for tax reporting purposes that Florida Power did

for regulatory accounting and financial reporting purposes,

except for specific Schedule M-1, Reconciliation of Income (Loss)

Per Books With Income Per Return, adjustments.4   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.

     During the years in issue, petitioner made Schedule M-1

adjustments on its original tax returns with respect to Florida

Power.   The Schedules M-1 adjustments for the years 1988 to 1991



     3
      (...continued)
might be increased. However, if P did elect to increase the size
of the retirement units under the authority of the FPSC, P would
be in violation of the FERC rules prohibiting increases in the
size of retirement units. Thus, the retirement units actually
used by Florida Power for regulatory accounting purposes
conformed with FERC rules.
     4
      A Schedule M-1 is a schedule attached to a Form 1120, U.S.
Corporation Income Tax Return. It identifies the different
treatment of income and expense items for book and tax purposes.
See Southwestern Energy Co. v. Commissioner, 

, 503
n.4 (1993); Orange & Rockland Utils. v. Commissioner, 

, 205 (1986).
                               - 8 -

reflected petitioner’s election to apply the percentage repair

allowance (PRA), a specific tax provision allowing petitioner to

deduct as repair expenses a set percentage of expenditures for

the repair, maintenance, rehabilitation, or improvement of

certain property.   See sec. 1.167(a)-11(d)(2), Income Tax Regs.5

The Schedule M-1 adjustment for 1992 was for a storm reserve and

related to damages caused by Hurricane Andrew.6   Other than the

variations for the PRA and storm reserve, petitioner used the

same characterizations of expenditures for tax purposes that

Florida Power did for regulatory accounting and financial

reporting purposes.

     For the taxable year 1992, petitioner filed two amended

returns with claims related to the characterization of

expenditures associated with Florida Power.   In its first amended

return, filed in September of 1993, petitioner claimed additional

storm expenses of $412,042 and an additional repair expense

deduction of approximately $4.7 million for cable injection


     5
      Respondent has alleged that the following amounts were
deducted as repair expenses under the PRA for the years 1988 to
1991:
               Year                       Amount
               1988                     $28,501,471
               1989                      29,315,281
               1990                      28,635,238
               1991                      25,806,865

Petitioner has not disputed these amounts.
     6
      The Schedule M-1 adjustment for the storm reserve was in
the amount of $6 million.
                               - 9 -

expenditures.   The storm expenses were accepted by respondent and

a portion of the claimed repair expense deduction was allowed by

respondent.   In its second amended return, filed in December of

1993, petitioner claimed an additional repair expense deduction

of approximately $21 million related to the same type of

expenditures currently in issue.   Respondent allowed an

additional repair expense deduction for these expenditures in the

amount of approximately $11 million.     During the audit of the

years 1988 to 1992, respondent proposed to capitalize certain

expenditures related to Florida Power that petitioner had

reported as deductible repair expenses on its original tax

returns.

                            Discussion

     Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.     See Northern Ind. Pub.

Serv. Co. v. Commissioner, 

, 295 (1993); Shiosaki v.

Commissioner, 

, 862 (1974).     Rule 121(a) provides that

either party may move for a summary judgment upon all or any part

of the legal issues in controversy.    Full or partial summary

judgment is appropriate where there is no genuine issue as to any

material fact and a decision may be rendered as a matter of law.

See Rule 121(b); Sundstrand Corp. v. Commissioner, 

,

520 (1992), affd. 

(7th Cir. 1994).     Respondent, as

the moving party, bears the burden of proving that no genuine
                                - 10 -

issue exists as to any material fact and that he is entitled to

judgment as a matter of law.    See Bond v. Commissioner, 

, 36 (1993); Naftel v. Commissioner, 

, 529 (1985).

In deciding whether to grant summary judgment, the factual

materials and the inferences drawn from them must be considered

in the light most favorable to the nonmoving party.      See Bond v.

at 36; Naftel v. 

at 529.

       Once a motion for summary judgment is made and supported,

the nonmoving party must do more than merely allege or deny facts

in its pleadings, it must “set forth specific facts showing that

there is a genuine issue for trial.      If the adverse party does

not so respond, then a decision, if appropriate, may be entered

against such party.”    Rule 121(d); Celotex Corp. v. Catrett, 

, 324 (1986); Sundstrand Corp. v. 

at

520.    Moreover, summary judgment may be granted if the evidence

submitted by the nonmoving party is merely colorable or not

significantly probative.    See Anderson v. Liberty Lobby, Inc.,

, 249-250 (1986).

       Petitioner argues that some of the factual allegations made

by respondent are in dispute.    After reviewing the materials

filed by both parties, we find that there is no genuine issue as

to any of the material facts that we have set forth in the

background section of this opinion.      “Only disputes over facts

that might affect the outcome of the suit under the governing law
                             - 11 -

will properly preclude entry of summary judgment.   Factual

disputes that are irrelevant or unnecessary will not be counted.”

Anderson v. Liberty Lobby, Inc., supra at 248.

     Respondent argues that petitioner’s attempt to

recharacterize as repair expenses, expenditures which it had

characterized as capital expenditures, is prohibited under

section 446(e) as an impermissible change in accounting method

because petitioner did not obtain respondent’s consent to

recharacterize the expenditures.   Respondent claims that, for

regulatory, financial, and tax accounting purposes, petitioner

consistently followed the regulatory accounting rules and

guidelines to determine which expenditures to capitalize and

which expenditures to expense at Florida Power’s electric plants.

Respondent contends that this consistent treatment constitutes

petitioner’s method of accounting with respect to the

expenditures in issue.

     Petitioner argues that its method of accounting was to

deduct expenditures to the extent allowed under section 1.162-4,

Income Tax Regs.,7 and that the regulatory accounting


     7
      Sec. 1.162-4, Income Tax Regs., provides:

          Sec. 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
                                                   (continued...)
                              - 12 -

requirements of the FERC and the FPSC were not its method of

accounting for purposes of determining the characterization of

expenditures at Florida Power’s electric plants.   In classifying

expenditures as capital expenditures or repair expenses for tax

purposes, petitioner claims that it used the amount of repair

expenses determined for regulatory accounting and financial

reporting purposes as a “reasonable approximation” of the amount

of repair expenses allowable for tax purposes.   From there,

petitioner claims that it made certain adjustments to increase

the deductible repair amount for tax purposes when it became

aware that certain expenditures were erroneously classified as

capital expenditures.   Petitioner also claims that the

recharacterization is a mere “correction” which does not

constitute a change in accounting method.   Finally, petitioner

implies that respondent’s failure to raise the change in

accounting method argument when petitioner claimed the additional

repair expense deduction for 1992 should prevent respondent from

now challenging petitioner’s attempted recharacterization.




     7
      (...continued)
     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.
                               - 13 -

I.   Method of Accounting

     Section 446(a) provides that “Taxable income shall be

computed under the method of accounting on the basis of which the

taxpayer regularly computes his income in keeping his books.”

The term “method of accounting” includes both the “over-all

method of accounting” and “the accounting treatment of any item.”

Sec. 1.446-1(a)(1), Income Tax Regs.    A method of accounting

includes “the consistent treatment of a recurring, material item,

whether that treatment be correct or incorrect.”    H.F. Campbell

Co. v. Commissioner, 

, 447 (1969), affd. 

(6th Cir. 1971).   A taxpayer changes its method of accounting

when it changes either the “overall plan of accounting for gross

income or deductions” or “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 “any item which involves the proper

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

deduction.”   Wayne Bolt & Nut Co. v. Commissioner, 

,

510 (1989); sec. 1.446-1(e)(2)(ii)(a), Income Tax Regs.    A change

in accounting method may be effected only after consent is

obtained from the Secretary.   See sec. 446(e).

     “The primary effect of characterizing a payment as either a

business expense or a capital expenditure concerns the timing of

the taxpayer’s cost recovery: While business expenses are

currently deductible, a capital expenditure usually is amortized
                              - 14 -

and depreciated over the life of the relevant asset”.     INDOPCO,

Inc. v. Commissioner, 

, 83-84 (1992).   This Court has

held that the determination of whether an expenditure constitutes

a capital expenditure or a currently deductible expense involves

the question of the proper time for taking a deduction.    See

Pelaez & Sons, Inc. v. Commissioner, 

, 489 (2000);

Southern Pac. Transp. Co. v. Commissioner, 

, 683

(1980), supplemented by 

(1984); Hooker Indus., Inc.

v. Commissioner, T.C. Memo. 1982-357; sec. 1.446-1(e)(2)(ii)(a),

Income Tax Regs.   An accounting practice involving the timing of

when an item is deducted is considered a method of accounting.

See GMC & Subs. v. Commissioner, 

, 296 (1999);

Knight-Ridder Newspapers, Inc. v. United States, 

,

797-798 (11th Cir. 1984).

     In Southern Pac. Transp. Co. v. 

, we

applied section 1.446-1(e)(2)(ii)(b), Income Tax Regs., for

purposes of deciding whether the expenditures in issue were for a

“material item”.   Section 1.446-1(e)(2)(ii)(b), Income Tax Regs.,

provides that “a correction to require depreciation in lieu of a

deduction for the cost of a class of depreciable assets which had

been consistently treated as an expense in the year of purchase

involves the question of the proper timing of an item, and is to

be treated as a change in method of accounting.”   Although the

taxpayer in Southern Pac. Transp. Co. v. 

, was
                                 - 15 -

attempting to change from capitalizing the expenditures in issue

to expensing them, the reverse of the situation described in the

regulations, we were not convinced of the merit of this

distinction and we regarded both situations as examples of

changes involving the timing of a deduction.    See Southern Pac.

Transp. Co. v. 

at 683 n.211.    We held that

the expenditures that the taxpayer was attempting to

recharacterize from capital to expense fit the definition of

“material item”.   

     Although section 446(a) requires a taxpayer to compute his

taxable income in the same manner that he computes income in his

books, this requirement is not absolute.   Courts have permitted

variations between financial and tax reporting where other Code

requirements, such as sections 162 and 263, are met, and the

method of accounting clearly reflects income.   See USFreightways

Corp. & Subs. v. Commissioner, 

, 332 (1999).     Where

the taxpayer is governed by regulatory agencies, the taxpayer is

not automatically required to follow the regulatory accounting

rules when it reports its activities for tax purposes.     See

Commissioner v. Idaho Power Co., 

, 14-15 (1974); Old

Colony R.R. v. Commissioner, 

, 562 (1932).     However,

while regulatory accounting rules are not binding on a taxpayer,

they are necessarily linked with tax accounting, and the

consistent practice of applying regulatory rules for tax
                               - 16 -

reporting purposes cannot be ignored.    See Commissioner v. Idaho

Power Co., supra at 14-15.    In that case, the Supreme Court

stated:

          Some, although not controlling, weight must be
     given to the fact that the Federal Power Commission and
     the Idaho Public Utilities Commission required the
     taxpayer to use accounting procedures that capitalized
     construction-related depreciation. Although agency-
     imposed compulsory accounting practices do not
     necessarily dictate tax consequences, they are not
     irrelevant and may be accorded some significance. * * *
     where a taxpayer’s generally accepted method of
     accounting is made compulsory by the regulatory agency
     and that method clearly reflects income, it is almost
     presumptively controlling of federal income tax
     consequences. [Id. at 14-15; citations and fn. ref.
     omitted.]

     For regulatory accounting and financial reporting purposes,

Florida Power followed regulatory rules and guidelines to

determine the characterization of expenditures related to its

electric plants.    The fact that the regulatory accounting

requirements allowed Florida Power some flexibility in defining

retirement units does not change this.    The retirement units used

by Florida Power for FPSC purposes did not exceed the limits

prescribed by the FERC for the years in issue, and petitioner

acknowledges that its characterization of expenditures for FPSC

purposes “automatically conformed with FERC regulatory accounting

principles.”    The FERC prohibited public utilities from

condensing the FERC list of retirement units or from adding any

retirement units that exceeded the size of the FERC retirement

units.    Once a retirement unit was established, the cost of
                                - 17 -

adding or replacing the retirement unit had to be capitalized.

Thus, while Florida Power’s limited flexibility in defining

retirement units could in some cases affect the amounts of

capital expenditures or repair expenses, once the retirement unit

was identified the regulatory characterization rules requiring

capitalization were not flexible.    The regulatory rules

ultimately determined which expenditures were capitalized and

which expenditures were expensed for regulatory accounting and

financial reporting purposes.

      In Southern Pac. Transp. Co. v. 

, the

taxpayer was subject to Interstate Commerce Commission (ICC)

accounting rules which required the capitalization of certain

expenditures.   See 

  For the taxable years at issue,

the taxpayer followed the ICC accounting rules and capitalized

the expenditures in issue for regulatory and tax purposes.    See

issued a notice of deficiency regarding

other issues, and the taxpayer filed a petition with this Court

for a redetermination of the deficiency.    See 

  In an

amended petition, the taxpayer raised, for the first time, the

argument that the Commissioner erred in failing to allow the

capitalized expenditures as currently deductible expenses.    See

  The Commissioner argued that the taxpayer’s attempt

to recharacterize the expenditures was an impermissible change in

the taxpayer’s method of accounting under section 446(e) because
                               - 18 -

the Commissioner had not consented to the change.     See 

   We held that, regardless of whether the expenditures were

more properly deductible as business expenses under section 162,

allowing the taxpayer to deduct such expenditures would result in

an impermissible change in method of accounting.     See 

We found it readily apparent that the taxpayer was seeking to

alter the manner in which it had consistently accounted for a

recurring, material item.    See 

   We explained that a

change in the treatment of the expenditures involved a question

of proper timing; thus, the change in treatment would affect a

material item.    See 

   The taxpayer consistently

followed the ICC accounting rules in capitalizing certain

expenditures for tax reporting purposes, and its later attempt to

recharacterize those expenditures as repair expenses was

prohibited, absent consent by the Commissioner.

       In Wayne Bolt & Nut Co. v. Commissioner, 

(1989),

the taxpayer, for a number of years, determined its ending

inventory by selecting a small portion of its inventory cards and

using them to approximate the ending inventory.     See 

Later, the taxpayer completed a physical inventory in which it

identified and catalogued all inventory.     See 

    Based

on this thorough examination of inventory, the taxpayer attempted

to adjust its opening inventory to reflect the actual amount

identified.    See 

  This amount was considerably
                                - 19 -

larger than the amount determined under the approximation method

previously used by the taxpayer.     See 

   We held that

the taxpayer’s “change from a seriously flawed and disorganized

method * * * to a method of determining both opening and ending

inventory * * * on the basis of a complete physical inventory

[was] a change in the treatment of a material item and,

therefore, [constituted] a change in accounting method.”       

    We found that the approximation method of determining

inventory, while disorganized and inaccurate, was consistently

used by the taxpayer despite his actual knowledge that the

inventory amounts were not completely accurate.      See 

This consistent practice constituted a method of accounting for

determining inventory.     See 

that Wayne Bolt & Nut Co. v. 

, does not apply because it involved inventories and they

are governed by separate and distinct rules for purposes of

determining a method of accounting.      We disagree.   While there

are specific regulations which address the accounting treatment

of inventories, the basic principles apply for purposes of

determining a method of accounting; namely, that a consistent

method used to determine the tax treatment of a material item is

a method of accounting.     Our holding and reasoning in Wayne Bolt

& Nut Co. v. 

, is applicable to the instant

case.
                               - 20 -

     The regulatory rules provided the guidelines for determining

Florida Power’s characterization of expenditures for regulatory

accounting and financial reporting purposes.    Petitioner

consciously chose to use consistently the same characterization

for tax purposes that Florida Power did for regulatory and

financial purposes.

     Petitioner argues that it used the amounts Florida Power

reported for regulatory purposes as a “reasonable approximation”

for tax purposes rather than reviewing its work orders to

determine which expenditures to capitalize and which to expense.

Petitioner has made no allegations that it alerted respondent to

the fact that it was reporting only approximations and expected

to recharacterize expenditures years later.    Section 1.446-

1(a)(4), Income Tax Regs., provides that the taxpayer’s

accounting records must be maintained in such a manner as to

enable him to file a correct return of his taxable income for

each taxable year.    One of the essential features that the

taxpayer must consider in maintaining such records is:

     Expenditures made during the year shall be properly
     classified as between capital and expense. For
     example, expenditures for such items as plant and
     equipment, which have a useful life extending
     substantially beyond the taxable year, shall be charged
     to a capital account and not to an expense account.
     [Electric & Neon, Inc. v. Commissioner, 

,
     1332 (1971), affd. 

(5th Cir. 1974)
     (quoting sec. 1.446-1(a)(4)(ii), Income Tax Regs.).]
                              - 21 -

     The FERC and FPSC rules provided a regulatory accounting

system which afforded petitioner with a 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.   We note “that

the ‘decisive distinctions’ between current expenses and capital

expenditures ‘are those of degree and not of kind,’ and * * *

each case ‘turns on its special facts’”.   INDOPCO, Inc. v.

(citation omitted).   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.   See Southern Pac. Transp. Co. v. Commissioner, 

; sec. 1.446-1(e)(2)(ii)(a) and (b), Income Tax Regs.

This attempt to recharacterize the expenditures in issue is to be

treated as a change in method of accounting.   See Southern Pac.

Transp. Co. v. 

; sec. 1.446-1(e)(2)(ii)(a) and

(b), Income Tax Regs.

     Petitioner argues that it made certain adjustments related

to Florida Power on its Schedules M-1 for the years in issue and

that such adjustments establish that petitioner’s method of

accounting was not simply to follow regulatory and financial

accounting for tax reporting purposes.   A Schedule M-1 is a
                               - 22 -

schedule attached to a Form 1120, U.S. Corporation Income Tax

Return.   It identifies the different treatment of income and

expense items for book and tax purposes.   See Southwestern Energy

Co. & Subs. v. Commissioner, 

, 503 n.4 (1993); Orange

& Rockland Utils. v. Commissioner, 

, 205 (1986).

     Respondent acknowledges that petitioner made Schedules M-1

adjustments on its tax returns for the years in issue.      However,

respondent argues that the adjustments do not change the fact

that petitioner’s method of accounting with respect to the

expenditures in issue was to use the regulatory rules and

guidelines to determine the proper characterization of

expenditures for regulatory, financial, and tax reporting

purposes.   Respondent claims that the Schedules M-1 adjustments

were only for the PRA and the storm reserve.    Petitioner does not

contend that there were any other Schedules M-1 adjustments.

     A.     Percentage Repair Allowance (PRA)

     The PRA concept originated in 1971 as part of the Asset

Depreciation Range system.8   The PRA was intended to end

controversies concerning whether certain expenditures for repair,

maintenance, or improvement of property must be capitalized or


     8
      In 1981, Congress repealed the entire PRA system effective
for property placed in service after Dec. 31, 1980, in taxable
years ending after such date. See Economic Recovery Tax Act of
1981, Pub. L. 97-34, sec. 203, 95 Stat. 221. The PRA continues
to be in effect for expenditures which, although incurred after
Dec. 31, 1980, are for the repair, maintenance, rehabilitation,
or improvement of property placed in service before Jan. 1, 1981.
                                - 23 -

currently deducted.    See Armco, Inc. v. Commissioner, 

, 949 (1987); sec. 1.167(a)-11(a)(1), Income Tax Regs.      By

electing the PRA, the taxpayer may automatically deduct up to a

set percentage of all expenditures for repair, maintenance,

rehabilitation, or improvement of “repair allowance property” for

the taxable year, as long as such expenditures are not considered

“excluded additions”.    Sec. 1.167(a)-11(d)(2), Income Tax Regs.

Expenditures in excess of the set percentage must be capitalized.

See 

* * [the PRA] system, certain expenditures

which typically would be capitalized can be treated as repair

allowances and, thus, deducted as expenses.”       United States v.

Wisconsin Power & Light Co., 

, 331 (7th Cir. 1994).

       For the years 1988 to 1991, respondent claims that

petitioner’s repair deductions for tax purposes consisted of the

amounts deducted for book purposes, plus Schedules M-1

adjustments for the PRA as follows:

Year             Book Account         M-1 Adjustment        Tax Return
1988             $372,757,769         $28,501,471         $401,259,240
1989              385,472,395          29,315,281          414,839,472
1990              408,077,080          28,635,238          436,688,025
1991              405,017,292          25,806,865          430,814,717

Petitioner does not dispute respondent’s figures, or allege that

there were Schedules M-1 adjustments for any other items for 1988

to 1991.

       The PRA is a specific tax only provision.    Florida Power did

not have the option of using the PRA to determine the
                                - 24 -

characterization of expenditures for regulatory accounting and

financial reporting purposes.    The PRA simply allowed petitioner

to characterize a set percentage of expenditures as repair

expenses for tax purposes.

     Petitioner is now trying to recharacterize as repairs, items

that it characterized as capital expenditures for tax purposes.

Petitioner cannot recharacterize amounts capitalized under the

PRA because to do so would violate the percentage limitation.

Petitioner does not identify any adjustments in the PRA or claim

that it made any error in the original computation under the PRA.

The expenditures that petitioner is trying to recharacterize are

those that petitioner consistently capitalized for regulatory,

financial, and tax reporting purposes.   This attempted

recharacterization conflicts with petitioner’s practice of having

tax accounting follow regulatory and financial accounting.

     B.   Storm Reserve

     On its original 1992 tax return, petitioner made a Schedule

M-1 adjustment of $6 million for a storm reserve related to

Florida Power.   The storm reserve related to an extraordinary

item; namely, to offset damages caused by Hurricane Andrew.   This

was not a recurring item which petitioner accounted for every

year, as evidenced by the absence of any Schedule M-1 adjustment

for a storm reserve for any of the other years in issue.

Additionally, petitioner has not claimed that it is seeking to
                              - 25 -

recharacterize this item.   The Schedule M-1 adjustment for the

storm reserve does not affect petitioner’s consistent treatment

of characterizing the expenditures in issue based on regulatory

rules and guidelines.   Petitioner has not alleged that there were

Schedule M-1 adjustments for any other items for 1992.

     C.   Audit Adjustments

     Petitioner argues that respondent’s allowance of additional

repair expense deductions on audit supports its position that

later recharacterizations were part of its method of accounting.

Petitioner contends that the facts that it amended its 1992

return and that respondent allowed additional repair expenses on

audit establish that petitioner’s method of accounting was not to

follow regulatory rules and guidelines when characterizing the

expenditures in issue for tax purposes.   Petitioner argues that

these adjustments support its position that its accounting

practice was to use regulatory characterizations as a “reasonable

approximation” and then make adjustments when errors were

discovered.

     Respondent disputes that the failure to raise the change in

method of accounting issue in any way prevents the current

disallowance of petitioner’s attempted recharacterization.

Respondent argues that the audit adjustments were simply part of

an overall settlement of the claim and that those actions do not

establish the method of accounting that petitioner is claiming.
                              - 26 -

     Petitioner consistently applied the characterizations used

by Florida Power for regulatory purposes when reporting for tax

purposes.   Petitioner made no references in its tax returns that

would notify respondent that the amount of claimed repair

expenses was a “reasonable approximation” and represented the

method of accounting that petitioner is claiming.    For the year

1992, petitioner filed two amended returns.   In its first amended

return, filed in September of 1993, petitioner claimed an

adjustment for storm expenses and an additional repair expense

for cable injection costs.   In its second amended return, filed

in December of 1993, petitioner claimed additional repair

expenses for the same type of expenditures as those currently in

issue and an adjustment for storm expenses.   After reviewing the

original and amended returns and meeting with petitioner,

respondent allowed some of the claimed expenditures to be

deducted as repair expenses and accepted the adjustment for storm

expenses.   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
                                - 27 -

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.

      Petitioner’s treatment of the expenditures in issue for tax

purposes was consistent with the treatment of those expenditures

by Florida Power for regulatory accounting and financial

reporting purposes.   The Schedules M-1 adjustments are, at best,

relatively minor deviations from petitioner’s method of

accounting.   The Schedules M-1 adjustments for the PRA and the

storm reserve, and 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 regulatory, financial, and tax reporting

purposes.   See Potter v. Commissioner, 

, 167 (1965)

(methods of accounting must be regular and consistent).

II.   Correction

      A change in method of accounting does not occur when a

taxpayer seeks to correct mathematical or posting errors, errors

in the computation of tax liability, a change in treatment

arising from a change in underlying facts, or any other

“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.”    Northern States Power Co. v.
                              - 28 -

United States, 

, 883 (8th Cir. 1998); sec. 1.446-

1(e)(2)(ii)(b), Income Tax Regs.

     Petitioner does not contend that it made errors in

mathematical computations or in the computation of its tax

liability.   Petitioner has failed to make specific allegations

establishing there was a change in underlying facts.

      Under section 1.446-1(e)(2)(ii)(b), Income Tax Regs., a

change from capitalizing and depreciating the costs of a class of

depreciable assets to expensing them involves a question of

proper timing.   Petitioner’s attempt to recharacterize

expenditures at Florida Power’s electric plants, which were

consistently capitalized on its tax returns, fits within the

principles of this regulatory provision.   Although the instant

case is the reverse of the situation set forth in the regulatory

provision, we regard both situations as examples of changes

involving the timing of a deduction.   See Southern Pac. Transp.

Co. v. Commissioner, 

n.211.     Additionally, this

Court has found that the characterization of expenditures as

capital or expense involves the proper time for taking a

deduction.   See Pelaez & Sons, Inc. v. Commissioner, 

; Southern Pac. Transp. Co. v. 

at 683;

Hooker Indus., Inc. v. Commissioner, T.C. Memo. 1982-357.

     A posting error occurs when there is an error in “the act of

transferring an original entry to a ledger.”     Wayne Bolt & Nut
                                 - 29 -

Co. v. Commissioner, 

(quoting Black’s Law

Dictionary 1050 (5th ed. 1979)).     Petitioner does not contend

that it erred in transferring the amount or characterization of

expenditures reported by Florida Power for regulatory purposes to

petitioner’s tax return.     Rather, petitioner relies on Northern

States Power Co. v. United 

, in arguing that it

erroneously capitalized the expenditures at issue and that the

attempted recharacterization should be treated as a posting

error.    Petitioner’s reliance on Northern States Power Co. v.

United 

is misplaced.        In Northern States Power Co.

v. United 

, the taxpayer’s tax department was

unaware that certain amounts were improperly recorded in its

accounts.   Because the taxpayer lacked knowledge of the error, it

mistakenly capitalized the amounts instead of currently deducting

them.    See 

  When it discovered the mistake, the

taxpayer promptly filed refund claims in an effort to treat the

amounts in the same manner that it had consistently treated

similar items.   See 

held that the taxpayer’s

mistake was more “akin to a posting error” than a change in

method of accounting.      

instant case, petitioner consciously chose to use the

same characterization of expenditures for tax reporting purposes

that Florida Power used for regulatory accounting and financial

reporting purposes.   Petitioner gave no notice on its returns
                                - 30 -

that it was using an “approximation” method and expected to make

later corrections.     Petitioner’s own statements establish that it

did not “mistakenly” capitalize the expenditures in issue based

on a lack of knowledge of an error.      Accordingly, we hold that

petitioner’s attempted recharacterization of the expenditures in

issue was not a posting error.    Cf. Wayne Bolt & Nut Co. v.

at 512.

III. Consent

     Petitioner implies that respondent waived the right to

contest petitioner’s recharacterization of capital expenditures

as repair expenses.9    Petitioner points to the fact that

respondent allowed petitioner to reclassify approximately $11

million in capitalized expenditures related to Florida Power as

repair expenses for the 1992 taxable year.      Prior to this motion,

respondent did not raise the change in accounting method

argument.

     Consent to change a method of accounting is required,

regardless of whether the “method is proper or is permitted under

the Internal Revenue Code or the regulations thereunder.”      Sec.

1.446-1(e)(2)(i), Income Tax Regs.       In Southern Pac. Transp. Co.

v. Commissioner, 

, we stated:


     9
      Petitioner claims that it “is not trying to work an
‘estoppel’”, but rather that it is simply trying to show that
respondent never treated the similarities between regulatory,
financial, and tax classifications of capital expenditures and
repair expenses as a method of accounting.
                              - 31 -

          In addition, consent is required when a taxpayer,
     in a court proceeding, retroactively attempts to alter
     the manner in which he accounted for an item on his tax
     return. If the alteration constitutes a change in the
     taxpayer's method of accounting, the taxpayer cannot
     prevail if consent for the change has not been secured.
     * * * [10]

     The failure of the Commissioner previously to object to the

taxpayer’s accounting method will not stop him from later

challenging it.   See Niles Bement Pond Co. v. United States, 

, 362 (1930); Fort Howard Paper Co. v. Commissioner, 

, 284 (1967); Hotel Kingkade v. Commissioner, 

, 568-569 (1949), affd. 

(10th Cir. 1950).     While

the Commissioner’s acquiescence in the taxpayer’s use of an

accounting method is not binding on the Commissioner, it may be a

factor in the taxpayer’s favor.   See Public Serv. Co. v.

Commissioner, 

, 456 (1982); Geometric Stamping Co. v.

Commissioner, 

, 304-305 (1956).

     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,



     10
      In Summit Sheet Metal Co. v. Commissioner, T.C. Memo.
1996-563, we relied on Southern Pac. Transp. Co. v. Commissioner,

(1980), supplemented by 

(1984), in
drawing a negative inference against the taxpayer who did not
seek to change the treatment of an item on its original tax
return or on an amended return, but rather waited until after the
Commissioner’s audit and after the commencement of court
proceedings.
                               - 32 -

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.   It is

undisputed that petitioner never filed a Form 3115 to request a

change in accounting method.   See sec. 1.446-1(e)(3)(i), Income

Tax Regs.   Accordingly, petitioner did not obtain respondent’s

consent to recharacterize the expenditures in issue.

IV.   Purpose of Section 446(e)

      The policy underlying section 446(e) was enunciated in

Pacific Natl. Co. v. Welch, 

, 194 (1938):

      Change from one method to the other, as petitioner
      seeks, would require recomputation and readjustment of
      tax liability for subsequent years and impose
      burdensome uncertainties upon the administration of the
      revenue laws. It would operate to enlarge the
      statutory period for filing returns * * * to include
      the period allowed for recovering overpayments * * * .
      There is nothing to suggest that Congress intended to
      permit a taxpayer, after expiration of the time within
      which return is to be made, to have his tax liability
      computed and settled according to the other method.
      * * * [11]

      11
      Since the amendment of the consent requirement in 1954,
this passage has been endorsed as an appropriate statement of the
policy rationale of sec. 446(e). See Lord v. United States, 

, 335 (9th Cir. 1961) (“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 Southern Pacific Transp. Co. v. 

at 686-687 (endorsing and restating the policies
articulated by Pacific Natl. Co. v. Welch, 

(1938),
                                                   (continued...)
                              - 33 -

In Barber v. Commissioner, 

(1975), we identified the

following policy reasons served by section 446(e): “(1) To

protect against the loss of revenues; (2) to prevent

administrative burdens and inconvenience in administering the tax

laws; and (3) to promote consistent accounting practice thereby

securing uniformity in collection of the revenue.”     

320 (citations omitted).   A comprehensive discussion and analysis

of the policy rationale of section 446(e) is found in Diebold,

Inc. v. United States, 

, 208-209 (1989):

     a central policy underlying the consent requirement is
     that the Commissioner should have an opportunity to
     review consent requests in advance. With advance
     notice, the Commissioner has leverage to protect the
     fisc, to avoid burdensome administrative uncertainties,
     and to promote accounting uniformity. If taxpayers
     generally were permitted to change accounting methods
     unilaterally, the Commissioner would face the enormous
     administrative burden of detecting changes and
     reviewing the propriety of each switch without ready
     leverage to protect the fisc or promote uniformity.

          In the absence of * * * [section 446(e)], a
     taxpayer could adopt a method of accounting and after
     several years unilaterally switch to an alternative
     method which hindsight suggests would have been more
     financially beneficial. Thus, the Commissioner’s
     ability to protect the fisc and prevent unnecessary
     variations in accounting procedures would be
     substantially reduced. In order to avoid missing
     taxable income, the IRS would be required to multiply
     its detection and examination efforts to prevent abuse
     of unconsented retroactive changes. The administrative
     advantages of advance notice are thus integrally linked
     to the purposes of protecting the fisc and promoting
     accounting uniformity.


     11
      (...continued)
and Lord v. United 

).
                             - 34 -

                          * * * * * * *

          Moreover, the plaintiff in this case desires to
     make precisely the kind of change that could undermine
     the purposes of the prior consent rule. The plaintiff
     seeks to apply a unilateral change retroactively to
     cover many past tax years. If taxpayers were permitted
     to select the accounting method which best reflects
     their income over the past four years, only those
     taxpayers gaining a financial advantage from switching
     methods would seek refunds. Thus, uniformity in
     accounting would become a function of financial
     advantage and the administrative difficulties of
     detecting unwarranted unilateral changes would be
     multiplied. Moreover, the potential impact on the fisc
     would be likely to vary unpredictably from year to
     year. In sum, the purposes and policies underlying the
     consent requirement are still served when a taxpayer
     presumes to change unilaterally from an incorrect to a
     correct procedure.

     Acceptance of petitioner’s position would grant petitioner

the license to change freely from one characterization to another

when hindsight shows that it is financially advantageous.

Petitioner waited until 1996 to attempt to recharacterize as

repair expenses, expenditures that it had characterized for tax

purposes as capital expenditures for the years 1988 to 1992.   It

would place an enormous burden upon respondent to detect and

review the ramifications of such a change.   For example,

petitioner’s attempt to recharacterize more than $200 million of

expenditures incurred from 1988 to 1992 as deductible repair

expenses would require adjustments to petitioner’s capital asset

accounts for those years and subsequent years.   Adjustments to

depreciation deductions taken in the years in issue and

subsequent years would be necessary.   The administrative burden
                                - 35 -

of reviewing the effects of petitioner’s recharacterization, such

as adjusting for claimed depreciation, would defeat the

accounting goal of promoting uniformity, to say nothing of the

complex computations and inconvenience in administering the tax

laws.     Petitioner’s attempted recharacterization is precisely the

type of change which frustrates the purpose of section 446(e) and

renders the consent requirement necessary.

V.   Conclusion

        Petitioner consistently used a method of accounting of

following regulatory rules and guidelines for regulatory,

financial, and tax reporting purposes for the expenditures in

issue.     Petitioner’s attempt to alter its classification of the

expenditures changes the timing of deductions related to those

expenditures and thus is a change in the treatment of a material

item.     This change in treatment of a material item does not

result from a correction or a change in underlying facts.

Petitioner did not seek respondent’s consent, nor did respondent

impliedly consent or waive the right to challenge petitioner’s

recharacterization as an impermissible change of accounting

method.     Petitioner’s claimed recharacterization frustrates the

purpose of section 446(e).     Accordingly, we hold that

petitioner’s attempted recharacterization of the expenditures in
                             - 36 -

issue is an impermissible change in method of accounting under

section 446(e).


                                   An appropriate order will be

                              issued granting respondent’s motion

                              for partial summary judgment.