FPL Group, Inc. - Page 15




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          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. Commissioner, supra 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”.  Id. at 683.                                               
               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, 113 T.C. 329, 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., 418 U.S. 1, 14-15 (1974); Old              
          Colony R.R. v. Commissioner, 284 U.S. 552, 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                    






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