Lykes Energy, Inc. and Subsidiaries - Page 1

                                 T.C. Memo. 1999-77                                   

                               UNITED STATES TAX COURT                                

                 LYKES ENERGY, INC. AND SUBSIDIARIES, Petitioners v.                  
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket Nos. 7685-96; 4979-97.     Filed March 11, 1999.                

                    S, a gas utility company, collected funds from its                
               customers which were earmarked for legislatively                       
               mandated energy conservation programs.  The State                      
               required S to account separately for the funds and                     
               monitored program expenditures.  S could not retain the                
               unexpended amounts and was charged interest on the                     
               funds that exceeded expenditures.  The largest                         
               expenditure was subsidies paid to purchasers of gas                    
               appliances from S.  S' sales, customer base, and rate                  
               base increased as a result of the programs.  Held: S'                  
               gross income includes the funds.  Held, further, S must                
               capitalize the expenditures, less the amount paid as                   
               subsidies, which is currently deductible.                              

               Nathan B. Simpson and Matthew J. Foster, for petitioners.              
               William A. Goss and Benjamin A. DeLuna, for respondent.                

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