The IRS today publicly released a Large Business and International (LB&I) directive as guidance to IRS examiners for use in determining when a taxpayer has replaced "substantially all" of a major component relating to steam or electric generation power, pursuant to Rev. Proc. 2013-24, for purposes of section 263(a). LB&I-04-0315-002 (dated July 6, 2015, and posted July 9, 2015)
The LB&I directive provides:
Today’s LB&I directive explains that taxpayers involved in generating steam or electric power incur significant expenditures to maintain, replace, and improve generation property. Whether these expenditures are deductible as repairs under section 162 or must be capitalized as improvements under section 263(a) depends on whether the expenditures improve a unit of property.
The LB&I directive notes that a generation plant is composed of numerous functionally interdependent items of machinery and equipment, and that it can be difficult to identify which items constitute discrete units of property, major components, or something else. Rev. Proc. 2013-24 provides definitions of units of property and major components for steam or electric power generation property that, if used in accordance with the requirements provided by Rev. Proc. 2013-24, will not be challenged by the IRS under section 263(a) and the related regulations.
Today’s LB&I directive sets forth instructions to the IRS field examiners related to examination activity of taxpayers that have changed their method of accounting to use the unit of property and major component definitions provided in Rev. Proc. 2013-24, as follows:
When examining returns of utility companies that generate steam or electric power for tax years ending on or after December 31, 2012, examiners are directed not to challenge the following "substantially all" determinations for taxpayers adopting the method of accounting as set forth in Rev. Proc. 2013-24:
The LB&I directive concludes that it only clarifies when a major component (or a unit of property that has no major components) is replaced. The ultimate determination of whether an expenditure involving the replacement of "less than substantially all" of a major component (or a unit of property that has no major components) is deductible is based on application of the regulations.
Challenges made by the IRS examiner to the taxpayer’s deduction of an expenditure involving replacement of less than substantially all of a major component (or a unit of property that has no major components) must be coordinated with the IRS Chief Counsel and approved by the Director of Field Operations.
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