Mixed Service Cost Examinations
June 8, 2006
MEMORANDUM FOR LMSB EXECUTIVES AND MANAGERS
/s/ Keith M. Jones
FROM: Keith M. Jones
Natural Resources and Construction
SUBJECT: Mixed Service Cost Examinations
This memorandum supersedes the December 5, 2005, memorandum to LMSB executives and managers from Bobby E. Scott, former Industry Director, Natural Resources and Construction. The purpose of this memorandum is to update our mandate to fully develop cases having mixed service costs issues.
On August 2, 2005, Revenue Ruling 2005-53 and temporary regulations were issued. Several meetings have taken place with external stakeholders, Chief Counsel, Appeals and LMSB. Updates have been given by the Emerging Issue Team as a part of their regular conference calls.
The Emerging Issue Team has communicated an action plan that requires full development of the “routine and repetitive” and “total mixed service costs” issues. Full development of the “routine and repetitive” issue requires: (1) reconciliation, usually to Federal Energy Regulatory Commission Form 1, of assets placed in service; (2) an electronic machine sensible file of those reconciled assets; (3) a statistically valid sample from the universe of reconciled assets; (4) IDR(s) issued requesting the underlying documents for the sampling units selected in the statistical sample; and 5) a decision on whether the assets qualify for "routine and repetitive" based upon Revenue Ruling 2005-53.
It is imperative that the total mixed service costs amount be fully developed in the event that some of the self-constructed assets qualify as eligible property. Full development of this issue requires removal from total mixed service costs of (1) all direct labor and direct material costs; (2) all costs related to ineligible assets; and (3) all costs from departments not having both production and non-production activities. The examination steps to analyze mixed service cost departments have been shared by the Emerging Issue Team and can be obtained from James K. Ellis, Territory Manager, NRC, or from our Utility or Section 263A technical advisors.
Please comply with the LMSB Commissioner memorandum, dated December 3, 2004, with respect to considering and developing penalties, if appropriate.
LMSB executives and managers involved in cases using the Simplified Service Cost Method should ensure that teams are taking the actions listed above to timely close cases. Questions about unique factual issues should be referred to the technical advisors early in the examination or prior to drafting the Notice of Proposed Adjustment (“NOPA”). Examiners should not suspend these actions awaiting resolution.
To assure full development and consistent treatment of the “routine and repetitive” and “total mixed service costs” issues and to assure proper consideration and development of penalties, all examination teams must submit their NOPAs to our Utility or Section 263A technical advisors for review prior to issuing the NOPAs to the taxpayer. Frank J. Genet (Frank.J.Genet@irs.gov) and Marge M. Lopez (Marge.M.Lopez@irs.gov), our Utility Technical Advisors, and Deborah A. Phillips (Deborah.A.Phillips@irs.gov), our Section 263A Technical Advisor, or their delegates, will review all NOPAs. NOPAs should be encrypted and submitted electronically to the reviewers who are committed to completing the review process within two weeks.
After review, cases that are fully developed should be closed from LMSB to Appeals. Resolution of this issue is not imminent and in order to achieve our goals we should actively pursue development of the identified issues.
This LMSB Directive is not an official pronouncement of the law or the position of the Service and cannot be used, cited or relied upon as such.
If you have questions, you may contact James K. Ellis, Territory Manager, at 713-209-3542.