The IRS Large Business & International Division (LB&I) issued a directive (LB&I-04-0917-004
) providing technical guidance aimed at assisting agents in determining the units of property (UOP) and major components frequently used in the mining industry under the tangible property regulations (TPR). The directive intends to reduce exam times and taxpayer burdens.
The regulations under Section 263(a) require taxpayers to capitalize improvements to a UOP. An improvement to a UOP occurs when there is a betterment, restoration, or a new or different use. A replacement of a major component of a UOP is considered a restoration of a UOP and therefore, an improvement to a UOP.
The directive recognizes that difficulty exists with mining property in identifying discrete UOP and major components under the TPR. Thus, taxpayers and the IRS may disagree about whether costs are capital expenditures or deductible expenditures.
Under the directive, agents should first determine if the taxpayer has previously filed an accounting method change under the TPR to change its determination of the UOP. If a change was filed, the agent should compare the method used by the taxpayer to the method outlined in the appendix of the directive. If the method is not consistent with the directive or if the taxpayer has not previously filed a method change the taxpayer would have the option of changing to the method in the directive by filing a Form 3115, Application for Change in Accounting Method
, or through an IRS-imposed change. For any taxpayers not wishing to apply the directive, normal audit procedures would apply.
For taxpayers not under exam, the directive suggests that a taxpayer that wants to change the definition of its UOP and major component to match those in the directive must follow the automatic change provisions in section 11.08 of Rev. Proc. 2017-30.
The directive states that it only intends to clarify the definition of a UOP or major component. The directive goes on to provide that taxpayers may not rely on the UOP definitions for other purposes of the code or regulations.
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