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Rules Governing Practice before IRS

Extending Transition Rules and the Scope Limitation Waiver for Taxpayers Adopting the Safe Harbor Method of Accounting for Electric Transmission and Distribution Property

September 3, 2014

LB&I Control No:  LB&I 04-0814-006
Impacted IRM 4.51.2

MEMORANDUM FOR ALL LARGE BUSINESS & INTERNATIONAL EMPLOYEES
FROM: Heather C. Maloy
Commissioner, Large Business & International Division
SUBJECT: Large Business & International Directive Extending Transition Rules and the Scope Limitation Waiver for Taxpayers Adopting the Safe Harbor Method of Accounting for Electric Transmission and Distribution Property-LB&I Directive #3

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, 2011-37 I.R.B. 326.  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.

This memorandum provides additional direction to the field regarding the transition rules for determining the percentage of a unit of property replaced set forth in Rev. Proc. 2011-43. section 5.03(3).  The Service is aware that some companies that own electric transmission and distribution property have not been able to timely revise their accounting systems to determine the percentage of a unit of linear property replaced and require additional time to revise these accounting systems.

In addition, this directive modifies LB&I Directive 4-1111-019 to conform to the scope limitation waiver set forth in Rev. Proc. 2014-16, 2014-9 I.R.B. 606.  This directive also supersedes LB&I Directive 04-0513-003.

Planning and Examination Guidance

(1) Section 5.03(3) of Rev. Proc. 2011-43 provides that "for the first three taxable years ending on or after December  31, 2010, a taxpayer using the transmission and distribution property safe harbor method provided by this revenue procedure may determine the percentage of a unit of linear property replaced on the basis of an average circuit within a county." (emphasis added)

This memorandum directs agents not to challenge a taxpayer's use of the above-stated transition rule for the first six taxable years ending on or after December 31, 2010 (i.e., for a calendar-year taxpayer with no intervening short years, taxable years ending 12/31/2010-12/31/2015).

(2) For a request to change to the transmission and distribution property safe harbor method, section 7.03 of Rev. Proc. 2011-43 waives for the taxpayer's first and second taxable year ending after December 30, 2010, the scope limitations in Rev. Proc. 2011-14, 2011-4 I.R.B., 330, that normally apply to a taxpayer under examination.  Rev. Proc. 2012-39, 2012-41 I.R.B., 470, section 3.01(3) extends this scope limitation waiver to the third taxable year ending after December 30, 2010.  Rev. Proc. 2014-16, section 3.01(2), further extends this scope limitation waiver to the fourth taxable year ending after December 30, 2010.

This directive modifies the planning and examination guidance set forth in LB&I Directive 4-1111-019. 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, third, or fourth 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 that section of 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 four-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 four-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, third, or fourth 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.

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:  Division Counsel, LB&I
      Chief, Appeals