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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. Commissioner, supra, the
taxpayer was subject to Interstate Commerce Commission (ICC)
accounting rules which required the capitalization of certain
expenditures. See id. at 676. 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
id. The Commissioner issued a notice of deficiency regarding
other issues, and the taxpayer filed a petition with this Court
for a redetermination of the deficiency. See id. at 505. 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
id. at 677. 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
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