New Administrative Authority Issued in Connection to the Tax Treatment of Repair and Maintenance Expenditures. (Contributing Author: Peter J. Scalise, B.S., M.S., June 26, 2013)

Introduction

The Internal Revenue Service (hereinafter “the Service”) issued Rev. Proc. 2013-24 on April 30 of 2013, providing guidance pursuant to the Industry Issue Resolution Program (hereinafter “IIR Program”) for taxpayers that have a depreciable interest in steam or electric power generation property primarily used in the trade or business of generating or selling steam (e.g., or steam in the form of heat) or electricity.

Rev. Proc. 2013-24, Appendix A also provides safe harbor definitions of “units of property” and “major components” that may be used by taxpayers to determine whether expenditures to maintain, replace, or improve steam or electric power generation property must be capitalized under I.R.C. § 263(a).

Rev. Proc. 2013-24 further encompasses:

Procedures for obtaining automatic consent to change to a method of accounting that uses all, or some of, the safe harbor definitions of “units of property” provided within Appendix A; and

An extrapolation methodology within Appendix B outlines that an eligible taxpayer may use in connection with a change in method of accounting for determining the amount of an I.R.C. § 481(a) adjustment.

The scope and application of Rev. Proc. 2013-24 is effective for tax years ending on or after December 31, 2012.

Scope and Application of New Administrative Authority

Rev. Proc. 2013-24 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 (e.g., or steam in the form of heat) or electricity. The subsequent attributes should be duly noted and strictly adhered to:

It only applies for property defined in Appendix A of Rev. Proc. 2013-24;

It does not apply to property used to produce electricity from alternative energy sources such as wind or photovoltaic; and

A 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.

Practically speaking, the Service issued Rev. Proc. 2013-24 to reduce the number of disputes regarding the deductibility or capitalization of expenditures to maintain, replace, or improve generation property. If a taxpayer uses the safe harbor definitions of “unit of property” and “major component” provided by Rev. Proc. 2013-24, this treatment will not be challenged by the Service.

Rev. Proc. 2013-24 describes and includes examples of “generation property” (i.e., as well as units of property and major components of generation property) and power stations.

Accounting Method Change Alert

Rev. Proc. 2013-24 provides that a change by a taxpayer to use the “units of property” and “major components” definitions is a change in method of accounting, and that a taxpayer seeking such a change must use the automatic change in method of accounting provisions in Rev. Proc. 2011-14 (e.g., or successor guidance).

In connection to the extrapolation methodology, Rev. Proc. 2013-24 explains that taxpayers may extrapolate their results to determine the I.R.C. § 481(a) adjustment amount for certain years by following the process provided in Appendix B.

Rev. Proc. 2013-24 also includes specific rules concerning changes in the method of accounting for taxpayers in the business of generating steam or electric power, by adding new section 3.20 to the appendix of Rev. Proc. 2011-14. The new automatic procedure provides, among other things, that the scope limitations in section 4.02 are waived for a taxpayer that changes to the method of accounting provided in Rev. Proc. 2013-24 for its first, second, or third tax year ending after December 30, 2012, and that a taxpayer must take the entire net I.R.C. § 481(a) adjustment into account (e.g., whether positive or negative) in computing taxable income in the year of change.

Conclusion

Rev. Proc. 2013-24, which was issued pursuant to the Service’s IIR Program, reflects a focused effort on the part of the Service and affected taxpayers in the electric utility industry to resolve subjective issues arising under I.R.C. § 263(a). As with other IIR safe harbor guidance, although Rev. Proc. 2013-24 provides safe harbors that affected taxpayers are not required to use, the Service anticipates that taxpayers will follow Rev. Proc. 2013-24 to minimize tax controversy issues described in this new administrative authority.

About the Author

Peter J. Scalise serves as the National Partner-in-Charge and the Federal Tax Practice Leader for Engineered Tax Services. Peter is a highly distinguished BIG 6 Alumni Tax Practice Leader and a noted thought leader in the accounting profession. Peter serves on both the Board of Directors and Board of Editors for The Ameri¬can Society of Tax Professionals (“ASTP”). Peter is also the Founding President and Chairman of The Northeastern Region Tax Roundtable, an Operating Division of ASTP. Peter is a volunteer member of the iShade Tax Faculty and a frequent keynote speaker for the AICPA, ABA, ASTP, NAREIT, NATP, TEI & AIA on specialty tax incentives, tax controversy matters and legislative updates from Capitol Hill.

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