Tier I Industry Director’s Directive on the Planning and Examination of Repairs vs. Capitalization Change in Accounting Method (CAM) #2

LMSB Control No.: LMSB-4-0110-002
Impacted IRM 4.51.2

January 22, 2010

Introduction: 

The Industry Director’s Directive on the Planning and Examination of the Repairs vs. Capitalization CAM Issue (IDD #1) elevates the issue to a Tier I status.  IDD #1 also states that the Proposed Regulations for tangible assets are not to be cited nor relied on until issued in final format.

This Directive (IDD #2) reinforces that examiners are not precluded from the examination of this issue once an automatic or advanced consent for an accounting method change is granted under Appendix Section 3.06 of Rev. Proc. 2008-52 and Rev. Proc. 97-27, respectively.

This memorandum is intended to provide direction to the field to effectively utilize resources in the examination of a taxpayer who changes their method of accounting to re-characterize previously capitalized costs under §263(a) as deductible repairs and maintenance under §162.  This 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. 

Background:

On August 27, 2009, amendments to Rev. Proc. 2008-52 were issued (See Rev. Proc. 2009-39).  Rev. Proc. 2008-52 provides the procedures by which a taxpayer may obtain automatic consent for a change in method of accounting to a method described in the Appendix of the procedure.  Rev. Proc. 2009-39 added new Appendix Section 3.06 to Rev. Proc. 2008-52 which applies to “Repair and Maintenance Costs.”  Appendix Section 3.06 provides automatic consent for a taxpayer that changes its method of accounting from capitalizing under §263(a) to deducting the repair and maintenance costs as ordinary and necessary business expenses under §162 and Treas. Reg. § 1.162-4 in compliance with current law.  These costs are paid or incurred to repair and maintain tangible property (including network assets).  Note that taxpayers may make correlative changes for structural components of buildings and tangible assets that were previously treated as dispositions, pursuant to new Appendix Sections 6.24 and 6.25 of Rev. Proc. 2008-52.  Those changes are included in this guidance by reference to Rev. Proc. 2008-52 Appendix Section 3.06.  

Prior to Rev. Proc. 2009-39, taxpayers were requesting and being granted consent for this accounting method change pursuant to Rev. Proc. 97-27.  Both the advance consent agreements issued pursuant to Rev. Proc. 97-27, and Appendix Section 3.06 of revised Rev. Proc. 2008-52 provide that the consent granted for this change is not a determination that the taxpayer is using the appropriate unit of property (UOP) in determining the deductibility of repair and maintenance costs.  The director will ascertain whether the taxpayer’s determination of its UOP, and the application of that UOP to specific expenditures, is correct.

Planning and Examination Guidance:

This Directive is written to reinforce that neither the granting of an automatic consent under Appendix Section 3.06 of Rev. Proc. 2008-52, nor the granting of consent under Rev. Proc. 97-27 precludes examiners from auditing the issue of whether certain expenses are deductible repair costs or costs that should be capitalized.  Examiners may challenge any factual representations made by a taxpayer in auditing this issue including, but not limited to, a taxpayer’s determination of a UOP.  Whether a taxpayer’s determination of its UOP is correct, and the determination that specific costs qualify for deduction or capitalization under current law are decisions left to field examiners.  Therefore, adjustments should be considered if field examiners discover that any of the taxpayer’s representations are incorrect including the taxpayer’s determination of a UOP. 

Issue Tracking

Examiners must use the following tracking codes when examining this issue.  They are: 

• UIL 263.14-01, and
• Issue Tracking Attribute Code 1400

If you have any questions, please contact the Change in Accounting Method Technical Advisor, the Capitalization Technical Advisors, or the appropriate Industry Technical Advisor.

cc:
Commissioner, LMSB
Deputy Commissioner (Operations)
Deputy Commissioner (International)
Division Counsel, LMSB
Commissioner, SBSE
Chief, Appeals
Director, Planning, Quality, Analysis & Support
Director, Research & Workload Identification