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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, 100 T.C. 500, 503 n.4 (1993); Orange
& Rockland Utils. v. Commissioner, 86 T.C. 199, 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
8In 1981, Congress repealed the entire PRA system effective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.
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