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Field Directive in Response to Electric Utility Taxpayers' Attempts to Reclassify Utility Property for MACRS Depreciation Purposes


Large and Mid-Size Business Division
March 14, 2005

                                       DIRECTORS, FIELD SPECIALISTS AND 
                                       INTERNATIONAL, LMSB
                                       DIRECTOR, PREFILING AND TECHNICAL
                                       GUIDANCE, LMSB
                                       AREA COUNSEL, LMSB
                                       DIRECTOR OF EXAMINATION, SB/SE
                                       DEPUTY COMMISSIONER, TE/GE

FROM: Bobby E. Scott     
              Industry Director
              Natural Resources and Construction

SUBJECT: Field Directive in Response to Electric Utility Taxpayers’ Attempts to 
                    Reclassify Utility Property for MACRS Depreciation Purposes

This memorandum provides direction to field personnel regarding change in accounting method filings that attempt to change the MACRS depreciation recovery period of public utility property.  As this directive is neither an official pronouncement of the law, nor the position of the Service, it cannot be used, cited, or relied upon as such.

Many electric public utility taxpayers have filed Forms 3115, Application for Change in Accounting Method, in an attempt to reclassify their asset classes and thereby change the recovery period for various groups of public utility property.

The asset classes and recovery periods of property subject to depreciation under I.R.C. section 168 (MACRS) are set forth in Rev. Proc. 87-56, 1987-2 C.B. 674, as clarified and modified by Rev. Proc. 88-22, 1988-1 C.B. 785.  It is generally inappropriate to reclassify property used by a taxpayer in a particular business activity for which an established asset class exists (for the electric utility industry, see asset classes 49.11 through 49.15) unless that property is identified in an assigned asset class for specific assets used in all business activities (see asset classes 00.11 through 00.4).  The asset classes and resulting recovery periods established for specific business activities were based on a composite analysis of assets generally used in that particular industry. 

In addressing the change in accounting method filings, it is recommended that examiners refer to the Utilities Technical Advisor discussion paper titled “Public Utilities – Depreciation Method Changes,” which can be found on the Utilities Technical Advisor web site.  This discussion paper offers both legal analysis and guidance as to whether certain electric utility assets should be reclassified.  Examiners also should refer to Rev. Rul. 2003-81, 2003-30 I.R.B. 126, which analyzes the proper asset guideline classes for certain electric utility assets.

Numerous Chief Counsel Advice Memorandums have also been published surrounding this issue.  These can be found in the NRC Digests and in the Utilities Technical Advisor section of the FY 02 NRC Utility MicroMash CPE.   All of these documents can be found on the Utilities Technical Advisor web site.

A change in a taxpayer’s asset classification under MACRS or ACRS may or may not be treated as a change in method of accounting to which the provisions of I.R.C. sections 446 and 481 would apply.  On December 30, 2003, the Service and Treasury issued Treas. Reg. section 1.446-1T(e)(2)(ii)(d), which delineates what changes in computing depreciation (or amortization) are, or are not, accounting method changes.   Pursuant to this regulation, a change in classification of property placed in service by a taxpayer in a taxable year ending on or after December 30, 2003, is a change in method of accounting, except if the change in classification of such property during a taxable year is due to a change in use of the property by the taxpayer during that year. 

However, for property placed in service by the taxpayer in taxable years ending before December 30, 2003, the Associate Chief Counsel (PS&I) issued on January 28, 2004, a Change in Litigating Position Notice (CC-2004-007), which provides that the Service’s position continues to be that a change in computing depreciation under MACRS or ACRS generally is a change in method of accounting; however, the Service will no longer assert the issue with respect to assets placed in service by the taxpayer in taxable years ending before December 30, 2003.   Examiners are encouraged to consult with Bonny Dominguez (330-253-7339) or Phil Whitworth (330-253-7346), PFTG Change in Accounting Method Technical Advisors, regarding any possible change in accounting ramifications associated with this issue.   

Questions can be referred to Don Burkhart or Frank Genet, PFTG Utility Technical Advisors.  Don can be reached at 330-253-7336 or via e-mail at .  Frank can be reached at 330-253-7340 or via e-mail at

Page Last Reviewed or Updated: 17-Nov-2015