LB&I directive provides guidance on units of property and major components for the mining industry

IRS Large Business & International Division 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.

Contact: Sharon Kay
Partner, Washington National Tax Office
T +1 202 861 4140

Ellen Martin
Partner, Washington National Tax Office
T +1 202 521 1558

Dave Auclair
National Managing Principal, Washington National Tax Office
T +1 202 521 1515

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.