## Facts

- Madison Gas and Electric Company (MGE) was a regulated Wisconsin public utility supplying electricity and natural gas to customers in Dane County.
- To meet rising electricity demand, MGE entered a 1967 joint power supply agreement with two other utilities to construct and operate the Kewaunee Nuclear Power Plant.
- The utilities held the plant as tenants in common with unequal ownership interests; each took electricity output in kind based on its ownership share and sold it to its own customers.
- The utilities shared operating, maintenance, and other costs in proportion to ownership interests and jointly coordinated construction and preparation for operations.
- In 1969 and 1970, before the plant began commercial operations, MGE incurred expenses for hiring and training plant employees, establishing operating procedures, and related pre-operational activities needed to operate the plant.
- MGE deducted these amounts as ordinary and necessary business expenses under IRC § 162(a).
- The Commissioner disallowed the deductions as capital expenditures connected to a new venture treated as a partnership for federal tax purposes; the Tax Court upheld the disallowance, and MGE appealed.

## Issues

1. Whether the joint arrangement to construct and operate the nuclear plant constituted a “partnership” for federal income tax purposes under IRC § 7701(a)(2) despite the parties’ tenancy-in-common form and in-kind output allocation.
2. Whether MGE’s pre-operational training and related costs were currently deductible under IRC § 162(a) as expenses of MGE’s existing utility business or were capital expenditures of a separate new venture that had to be capitalized.

## Decision

- The Seventh Circuit affirmed the Tax Court’s judgment for the Commissioner.
- The court held the joint nuclear-plant arrangement was a partnership for federal tax purposes under IRC § 7701(a)(2).
- The court held the disputed pre-operational costs were capital expenditures of that partnership venture and were not currently deductible by MGE under IRC § 162(a).

## Legal Principles

- For federal tax purposes, “partnership” under IRC § 7701(a)(2) includes joint ventures and other unincorporated groups carrying on a business for profit, regardless of state-law labels such as tenancy in common.
- Profit sharing may occur through in-kind distributions (such as output allocation) and still support partnership classification when parties jointly own, manage, and bear costs and risks of a profit-seeking operation.
- Expenditures incurred to create, ready, or place into operation a new income-producing facility or separate venture—such as pre-operational hiring, training, and procedure development—are capital in nature and not “ordinary and necessary” current expenses under IRC § 162(a).
- An existing business’s characterization of spending as “expansion” does not control when the spending is tied to establishing a distinct jointly operated venture treated as a separate business for tax purposes.

## Conclusion

The court treated the jointly owned nuclear power project as a partnership for federal tax purposes and required capitalization of pre-operational training and related start-up costs, rejecting MGE’s attempt to deduct them as ordinary and necessary expenses of its ongoing utility business.


Madison Gas & Elec. Co. v. Comm’r, 633 F.2d 512 (7th Cir. 1980)