Industry Director Directive # 3 on Mixed Service Costs
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
Large and Mid-Size Business Division
Impacted IRM 4.51.5
May 2, 2007
MEMORANDUM FOR INDUSTRY DIRECTORS
DIRECTOR, FIELD SPECIALISTS
DIRECTOR, PREFILING AND TECHNICAL GUIDANCE
FROM: Keith M. Jones
Natural Resources and Construction
SUBJECT: LMSB Tier I Mixed Service Cost Issue - Field Directive on the Formation of Issue Specialization Teams - #3
This directive is intended to provide guidance to the field on the use of Issue Specialization Teams to provide direction and oversight on the Tier I Mixed Service Cost (MSC) Issue.
There are two phases to the MSC Tier I Issue. Phase I of the issue relates to the use of the Simplified Service Cost Method (SSCM) to determine the capitalizable mixed service costs. This applies to tax years ending before 8/2/2005 and Revenue Ruling 2005-53 relates to this phase of the issue. Phase II of the issue deals with the use of a reasonable method using facts and circumstances to determine capitalizable mixed service costs. This applies to taxable years ending on or after August 2, 2005 and recently finalized Regulations 1.263A-1 & 2 apply to Phase II of the issue. Issue Specialization Teams (IST) have been formed (Attachment I) to assist those teams which have Phase I issues still open, and also to assist teams as they encounter the Phase II issues on the 2005 and later returns.
Project Code 0511 Tracking Code 1511
Phase I - Simplified Service Cost Method UIL 263A-07-00 SAIN 707 Second Tier SAIN 190
Phase II - Facts & Circumstances UIL 263A.06-01 SAIN 707 Second Tier SAIN 191
Accuracy-related Penalty UIL 6662.00-00 SAIN 624-01 Second Tier SAIN 192
Planning and Examination Guidance:
The issue can be identified by the taxpayer’s filing of a 3115 to change their method of accounting for mixed service costs in order to comply with the regulations issued 8/3/2005 (1.263A-1T & 2T). The 3115 may be filed with National Office as an advanced consent or it may be filed with the tax return as an automatic change. Agents should be aware that there will generally be a book/tax difference for the 263A computation when a taxpayer implements the new fact and circumstances method and/or to reverse any amounts previously allowed for tax under the SSCM method. Therefore, an in-depth review of the Schedule M-3 difference is warranted. Most taxpayers who were involved in the Phase I issue will also be subject to the Phase II issue as a result of the change to a new accounting method.
Planning and Examination Risk Analysis
The issue is a Tier I issue, and therefore, a mandatory examination item. Upon identifying the issue, agents in all industries must contact the applicable Issue Specialization Team (IST) from their assigned industry listed in Attachment I.
Audit Techniques will include the review of the new accounting method to determine if the method is a "reasonable method" as defined at 1.263A-1(f)(4) of the regulations. Proforma IDRs will be developed by the IST. They will work with the on-site examination team to issue applicable IDRs and fully develop the MSC issues. The Revenue Agents from the IST will go to audit sites as warranted to assist in issue development. All 5701s must be approved by the Utility TAs prior to issuance.
Effect on Other Guidance:
This directive provides additional guidance on the Mixed Service Cost issue. It does not supersede the previous directives on this issue.
Copies of forms 3115 filed by the taxpayer to make these changes should be mailed/faxed to the Utility TA, Frank Genet at 2 S. Main St., Akron, OH 44308 or FAX (330) 253-7232. Please contact the lead Revenue Agent for your respective industry listed in Attachment I. If you have any questions, please contact Frank Genet, Utility Technical Advisor at (330) 253-7340 or Frank J. Genet, or you may contact James K. Ellis, Territory Manager, at (713) 209-3542 or James.K.Ellis@irs.gov .
This Directive is not an official pronouncement of law, and cannot be used, cited, or relied upon as such.
cc: Commissioner, LMSB
Deputy Commissioner, Operations
Deputy Commissioner, International
Division Counsel, LMSB
Directors, Field Operations
Director, Performance, Quality and Audit Assistance