Internal Revenue Bulletin: 2013-22
May 28, 2013
Table of Contents
- SECTION 1. PURPOSE
- SECTION 2. BACKGROUND
- SECTION 3. SCOPE
- SECTION 4. DEFINITIONS
- SECTION 5. UNITS OF PROPERTY AND MAJOR COMPONENTS OF GENERATION PROPERTY
- SECTION 6. CHANGE IN METHOD OF ACCOUNTING
- SECTION 7. EFFECT ON OTHER DOCUMENTS
- SECTION 8. EFFECTIVE DATE
- SECTION 9. DRAFTING INFORMATION
This revenue procedure provides definitions of units of property and major components taxpayers may use to determine whether expenditures to maintain, replace, or improve steam or electric power generation property must be capitalized under § 263(a) of the Internal Revenue Code. This revenue procedure also provides procedures for obtaining automatic consent to change to a method of accounting that uses all, or some of, the unit of property definitions provided.
.01 Taxpayers that generate steam or electric power incur significant expenditures to maintain, replace, and improve generation property. Whether these expenditures are deductible as repairs under § 162 or must be capitalized as improvements under § 263(a) depends on whether the expenditures materially increase the value of the property or appreciably prolong its life. See § 1.162-4 of the Income Tax Regulations. In general, under § 263(a) the cost of replacing a unit of property or major component must be capitalized.
.02 A generation plant is composed of numerous functionally interdependent items of machinery and equipment, and it can be difficult to identify which items constitute discrete units of property, major components, or something else. As a consequence, taxpayers and the Internal Revenue Service (Service) often disagree about whether the cost to replace a particular item is a capital or deductible expense.
.03 To minimize disputes regarding the deductibility or capitalization of expenditures to maintain, replace, or improve generation property, this revenue procedure provides “unit of property” and “major component” definitions which, if used by a taxpayer as provided in the revenue procedure, will not be challenged by the Service.
.04 A taxpayer’s method for determining whether an expenditure is deductible or is capitalizable, including unit of property and major component definitions, is a method of accounting under § 446. Section 446(e) and § 1.446-1(e) require taxpayers to secure the consent of the Commissioner before changing a method of accounting for Federal income tax purposes. Section 1.446-1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions necessary to permit a taxpayer to obtain consent to change a method of accounting.
.01 Applicability. This revenue procedure applies to a taxpayer that has a depreciable interest in steam or electric power generation property primarily used in the trade or business of generating or selling steam (or steam in the form of heat) or electricity.
.02 Inapplicability. This revenue procedure applies only to property defined in Appendix A of this revenue procedure. Specifically, this revenue procedure does not apply to property used to produce electricity from alternative energy sources such as wind or photovoltaic.
.03 Scope determined at entity level for consolidated groups and passthrough entities. The determination of whether a taxpayer is within the scope of this revenue procedure is made by each member of a consolidated group, by a partnership, or by an S corporation.
The following definitions apply solely for purposes of this revenue procedure:
.01 Generation property. “Generation property” means real and personal property that is used to generate steam or electricity and transmit that steam or electricity to the transmission and distribution network. Generation property excludes the transmission and distribution network. Examples of generation property include coal-fired, natural gas-fired, oil-fired, hydroelectric, and nuclear-powered power stations. Generation property does not include real or personal property not directly used to generate, conduct, or control steam or electricity at any point within a power station. For example, generation property does not include an accessory building (such as an administrative, training, or laboratory building), an office building, an administrative office section of a power station, or furniture and equipment used in such buildings or offices.
.02 Power station. A “power station” is generally, at a minimum, one generating unit — that is, the combination of a power source (some means of providing kinetic energy to the turbine, such as a boiler or dam), a turbine, and a generator. A power station may combine multiple generating units. However, a heat-only boiler station for generating steam power also qualifies as a power station for purposes of this revenue procedure. Due to design variations, an individual power station may or may not contain all of the units of property or major components listed in Appendix A.
.01 In general. If used in accordance with the requirements set forth in this revenue procedure, the unit of property or major component determinations provided in Appendix A of this revenue procedure will not be challenged by the Service under § 263(a) and the regulations thereunder.
.02 Universal use of units of property not required. A taxpayer within the scope of this revenue procedure is not required to use all the unit of property definitions provided in Appendix A of this revenue procedure and, therefore, may use one or more of the unit of property definitions provided. However, this revenue procedure does not apply to property for which a taxpayer does not use a unit of property definition provided in Appendix A. A taxpayer that uses a unit of property definition provided in Appendix A must also use the major component definition(s) listed in Appendix A for that unit of property. Additionally, a taxpayer may not rely on a major component definition without using the corresponding unit of property definition. Once used, a unit of property definition and the corresponding major component definition(s) for that unit of property apply to all similar assets, including similar electric generation property subsequently acquired in an applicable asset acquisition as defined in § 1060 or in a transaction to which § 338(h)(10) applies.
.03 Limitation. A taxpayer may not rely on the unit of property definitions provided in this revenue procedure for any other purpose of the Code or Regulations, including for determining the unit of property under other Code sections (for example, § 263A), or determining the asset for depreciation purposes (including placed in service dates, retirements, dispositions, or classification under § 168(e) or Rev. Proc. 87-56, 1987-2 C.B. 674), for the same or similar type of assets used in electric power generation.
.04 Example. X is an electric utility company that files its Federal income tax return on a calendar year basis. X operates a power plant to generate electricity and uses the unit of property and major component definitions provided by this revenue procedure for each of the following items of property: (1) a structure that is not a building under § 1.48-1(e)(1), (2) four pulverizers that grind coal, (3) one boiler that produces steam, (4) one turbine that converts the steam into mechanical energy, and (5) one generator that converts mechanical energy into electrical energy. In addition, the turbine contains a series of blades that cause the turbine to rotate when affected by the steam. Under section 5 and Appendix A, section 2, of this revenue procedure, X treats the structure (Appendix A, section 2.02), the boiler (Appendix A, section 2.03), the turbine (Appendix A, section 2.11), the generator (Appendix A, section 2.12), and each of the four pulverizers (Appendix A, section 2,18) as separate units of property. X is not required to treat components, such as the turbine blades, as separate units of property, but under Appendix A, section 2.11(2)(c), each complete set of blades in each section of the turbine must be treated as a major component.
.01 In general. A change to use the unit of property and major component definitions provided by this revenue procedure is a change in method of accounting to which the provisions of §§ 446 and 481, and the regulations thereunder, apply. A taxpayer that wants to change to the method of accounting described in this revenue procedure must use the automatic change in method of accounting provisions in Rev. Proc. 2011-14, 2011-4 I.R.B. 330, or its successor, as modified by this revenue procedure.
.02 Extrapolation. Taxpayers applying the method of accounting provided in this revenue procedure may extrapolate results to determine the § 481(a) adjustment amount for certain years by following the relevant procedures provided in Appendix B to this revenue procedure. Extrapolation methodologies not permitted in Appendix B to this revenue procedure are not permitted under the method of accounting.
.03 Automatic change. Rev. Proc. 2011-14 is modified to add new section 3.20 to the APPENDIX, to read as follows:
.20 Method of accounting under Rev. Proc. 2013-24 for taxpayers in the business of generating steam or electric power.
(1) Description of change. This change applies to a taxpayer that is within the scope of Rev. Proc. 2013-24 and wants to change its treatment of generation property expenditures to use all, or some of, the unit of property definitions and the corresponding major component definitions described in Rev. Proc. 2013-24.
(2) Waiver of scope limitations. The scope limitations in section 4.02 of this revenue procedure do not apply to an eligible taxpayer that changes to the method of accounting provided in Rev. Proc. 2013-24 for its first, second, or third taxable year ending after December 30, 2012.
(3) Section 481(a) adjustment.
(a) A taxpayer must take the entire net § 481(a) adjustment into account (whether positive or negative) in computing taxable income in the year of change. For guidance regarding the use of extrapolation in computing a § 481(a) adjustment, see Rev. Proc. 2013-24, section 6.02 and Appendix B.
(b) A taxpayer changing to this method of accounting must not include in the § 481(a) adjustment any amount attributable to property for which the taxpayer elected to apply the repair allowance under § 1.167(a)-11(d)(2) for any taxable year in which the repair allowance election was made.
(4) Ogden copy of Form 3115 required in lieu of national office copy. A taxpayer changing its method of accounting under section 3.20 of the APPENDIX must file a signed copy of its completed Form 3115 with the IRS in Ogden, UT (Ogden copy), in lieu of filing the national office copy no earlier than the first day of the year of change and no later than the date the taxpayer files the original Form 3115 with its Federal income tax return for the year of change. See sections 6.02(3)(a)(ii)(B) (providing the general rules) and section 6.02(7)(b) (providing the mailing address) of this revenue procedure.
(5) Designated automatic accounting method change numbers. The designated automatic accounting method change number for a change to the method of accounting provided in Rev. Proc. 2013-24 is “182.”
(6) Contact information. For further information regarding a change under this section, contact Alan S. Williams at (202) 622-4950 (not a toll free call).
Rev. Proc. 2011-14 is modified to include the accounting method change in this revenue procedure in section 3 of the Appendix.
This revenue procedure is effective for taxable years ending on or after December 31, 2012.
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