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Extension of Transition Rules for Taxpayers Adopting the Safe Harbor Method of Accounting for Electric Transmission and Distribution Property-LB&I Directive #2

LB&I Control No: LB&I-04-0513-003
Impacted IRM 4.51.2

May 2, 2013

MEMORANDUM FOR ALL LARGE BUSINESS & INTERNATIONAL EMPLOYEES
FROM: Heather C. Maloy /s/ Heather C. Maloy
Commissioner, Large Business & International Division
SUBJECT: Large Business & International Directive Extension of Transition Rules for Taxpayers Adopting the Safe Harbor Method of Accounting for Electric Transmission and Distribution Property-LB&I Directive #2

Introduction

This memorandum provides direction to the field in the examination of a taxpayer eligible to change to the transmission and distribution property safe harbor method described in Rev. Proc. 2011-43.  Rev. Proc. 2011-43 provides a method for taxpayers to determine whether expenditures to maintain, replace, or improve electric transmission and distribution property must be capitalized under I.R.C. § 263(a) or are deductible under I.R.C. § 162.  The Service is aware that some companies that own electric transmission and distribution property have not been able to adopt the safe harbor method of accounting described in Rev. Proc. 2011-43 within the time prescribed.  Rev. Proc. 2012-39 modifies section 3.09 of the APPENDIX of Rev. Proc. 2011-14 to extend the waiver of scope limitations to the third taxable year ending after December 30, 2010.

As such, this directive modifies the planning and examination guidance set forth in LB&I Directive 4-1111-019, issued November 25, 2011 and entitled “Large Business & International Directive Transition Rules for Taxpayers Adopting the Safe Harbor Method of Accounting for Electric Transmission and Distribution Property.”  Specifically, if a taxpayer with applicable asset expenditures has not adopted the safe harbor method pursuant to Rev. Proc. 2011-43 for its first, second, or third taxable year ending after December 30, 2010, the examiner should follow the guidance under Planning and Examination Guidance – Tax Years Ending On or After December 31, 2010, as provided in the next section in LB&I Directive 4-1111-019.

Correspondingly, if an examiner needs to develop and issue a Form 5701 with a Form 886-A, Explanation of Adjustments, the required language provided in LB&I Directive 4-1111-019 should be modified to reflect that a three-year period has been provided in which taxpayers may adopt the safe harbor method of accounting provided in Rev. Proc. 2011-43:

The Service neither accepts nor rejects the position stated in the tax return related to the method to determine the proper repair expense with respect to electric transmission and distribution property. [Insert taxpayer name] will be allowed a three-year period to adopt the safe harbor method provided in Rev. Proc. 2011-43.  If the safe harbor method is adopted, a change in method of accounting can be made in accordance with Section 7 of the applicable revenue procedure for all of the transmission and distribution property.  If [Insert taxpayer name] has not adopted the safe harbor method in its first, second, or third taxable year ending after December 30, 2010, the repair expense will be subject to risk assessment and possible examination for tax years ending on or after December 31, 2010.

This directive applies to taxpayers who are eligible to use the Rev. Proc. 2011-43 safe harbor, whether or not a change to the safe harbor method of accounting has been filed.

Planning and Examination Guidance

All planning and examination guidance provided in LB&I Directive 4-1111-019 remains in effect, subject to the modifications provided above.

Contacts

If you have any questions, please contact the Deductible and Capital Expenditures IPG.

This Directive is not an official pronouncement of law and cannot be used, cited, or relied upon as such.

cc:  Commissioner, LB&I
       Deputy Commissioner, Operations
       Deputy Commissioner, International
       Division Counsel, LB&I
       Chief, Appeals
       Directors, Field Operations
       Director, PFTG

Page Last Reviewed or Updated: 18-Apr-2014