Madison Gas and Electric Co. v. Commissioner

Madison Gas and Electric Co. (Madison) (plaintiff) was a public utility that produced and distributed electricity. In 1967 Madison entered into an agreement with Wisconsin Public Service Corporation and Wisconsin Power and Light Co. (collectively, the companies) to construct and operate a nuclear generating plant, the Kewaunee Nuclear Power Plant (the power plant). The companies owned the power plant as tenants in common with unequal ownership interests. The companies intended to create a tenancy in common, not a partnership. Electricity produced by the power plant was divided based on each company’s ownership interest for each company to sell for its individual profit. Operation and maintenance costs also were distributed among the companies according to their ownership interests. In 1969 and 1970, Madison contributed to costs related to the hiring and training of employees, the establishment of internal procedures and guidelines for the power plant’s operation, and other related expenses necessary for the operation of the power plant. Madison claimed a tax deduction on its income-tax returns for 1969 and 1970, classifying the costs as necessary business expenses. The Commissioner of Internal Revenue (the Commissioner) (defendant) disallowed the deduction. The Commissioner believed that the costs were capital expenditures related to the start-up of a new partnership. The United States Tax Court upheld the Commissioner’s determination, and Madison appealed.