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LB&I issues directive for cable network assets

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The IRS Large Business and International Division (LB&I) issued a directive instructing examiners to discontinue exam activity and not begin new activity related to certain expenditures to maintain, repair or improve cable network property.

Taxpayers and the IRS have often disagreed about whether replacement of a particular item is an improvement that must be capitalized, because it has been difficult to apply capitalization principles to cable networks assets. The IRS issued Rev. Proc. 2015-12 to resolve this issue.

That revenue procedure provides two alternative safe harbor approaches to determine whether expenditures to maintain, replace or improve cable network assets may be deducted as repairs under Section 162 or must be capitalized as improvements under Section 263(a) or as property produced by the taxpayer under Section 263A: (i) the network allowance method or (ii) a units-of-property method.  

Rev. Proc. 2015-12 also provides two alternative methods for determining whether the costs of customer drops may be deducted as repairs under Section 162 or must be capitalized as improvements under Section 263(a) or as a property produced by the taxpayer under Section 263A:  (i) the specific identification method or (ii) a safe harbor method.

The revenue procedure is effective for the taxable year ending after Dec. 31, 2013.  The scope limitations of Section 5.01(1)(d) and (f) of Rev. Proc. 2015-13 are waived by Rev. Proc. 2015-12 for taxpayers that change their method of accounting to comply with Rev. Proc. 2015-12 for their first or second taxable year ending after Dec. 31, 2013.

For examination of tax years ending before Jan. 1, 2014, related to the issues described in the following, the directive instructs examiners to discontinue exam activity and not to begin any new activity when examining returns of cable companies. The directive also provides steps that examiners should follow to discontinue exam activity related to the issues.  

The directive applies to positions taken on original returns relating the following issues:

  • Whether the cost to maintain, replace or improve cable network assets may be deducted as repairs under Section 162 or must be capitalized as improvements under Section 263(a) or as property produced by the taxpayer under Section 263A
  • Whether the costs of customer drops may be deducted as repairs under Section 162 or must be capitalized as improvements under Section 263(a) or as a property produced by the taxpayer under Section 263A
  • Any corresponding issues involving the disposition of structural components of a building or disposition of cable network assets

For examinations for taxable years after Dec. 31, 2013, the directive indicates that examiners should determine if a taxpayer filed a Form 3115, “Application for Change in Accounting Method,” to change to any of the methods provided in Rev. Proc. 2015-12. If so, the examiners must determine if it is consistent with Rev. Proc. 2015-12 and whether the Section 481(a) adjustment is accurate.

If a taxpayer hasn’t filed a method change under Rev. Proc. 2015-12 for its first or second taxable year ending after Dec. 31, 2013, the directive instructs the agent to perform a risk assessment to determine the materiality of the repair deduction claimed regarding the cable property.

Contacts
Sharon Kay
+1 202 861 4140
sharon.kay@us.gt.com

Ellen Martin
+1 202 521 1588
ellen.martin@us.gt.com

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