Lykes Energy, Inc. and Subsidiaries - Page 2

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                       MEMORANDUM FINDINGS OF FACT AND OPINION                        
               LARO, Judge:  This consolidated case was submitted to the              
          Court without trial.  See Rule 122(a).  Lykes Energy, Inc.                  
          (Lykes) and Subsidiaries petitioned the Court to redetermine the            
          following Federal income tax deficiencies:                                  
                    Taxable Year        Deficiency                                    
                    1988                $1,075,219                                    
                    1989                1,023,665                                     
                    1990                1,306,399                                     
                    1991                1,524,819                                     
                    1992                1,704,765                                     
                    1993                1,904,928                                     
                    1994                1,953,607                                     
               We must decide whether funds collected by Lykes' subsidiary,           
          People's Gas System, Inc. (People's), under the terms of certain            
          energy conservation programs (FEECA programs) are includable in             
          People's gross income.  We hold they are.  We also must decide              
          whether People's expenditures under the FEECA programs are                  
          required to be capitalized under section 263(a).1  We hold they             
          are to the extent described herein.  Unless otherwise indicated,            
          section references are to the Internal Revenue Code in effect for           
          the subject years.  Rule references are to the Tax Court Rules of           

               1 People's participated in seven FEECA programs.  Respondent           
          has conceded that petitioners may deduct expenditures for two of            
          these programs; namely, the Residential Conservation Service                
          Program and the Appliance Energy Savings Payback Program.  The              
          parties agree that any amounts required to be capitalized must be           
          amortized over 13 years.                                                    

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