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In holding that the taxpayer was not entitled to a current
deduction for refunds not yet made, the court, relying on Iowa S.
Utils. Corp., found that the taxpayer’s obligation to refund was
not a deductible liability but was merely an obligation to reduce
its future income. See Roanoke Gas Co. v. United States, supra
at 136-137. The Court of Appeals pointed to several factors that
supported its determination. First, rather than an actual
movement of funds from the taxpayer to its customers, a setoff on
customers’ bills was used as the medium for carrying out the
refunds. Second, the identity of the customers who received the
refunds was not identical to the customers who had overpaid funds
in the earlier year of overcollection. Finally, no interest
component was included with the refund for the time span between
when the refunds were ordered by the regulatory agency and when
the refunds were actually carried out on customers’ bills. In
the view of the court, these factors, when combined, made the
refunds resemble a reduction in future income rather than a
deductible expense.
The decision of this Court in Southwestern Energy was based
on facts nearly identical to those of Roanoke Gas Co. This Court
recognized that there is a difference between an expenditure,
deductible under section 162, and a mere reduction in income
under a regulatory requirement that a taxpayer utility compute
its rates in a manner that offsets overrecoveries from a previous
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