United States

IRS issues directive on examinations of costs related to cable property

TAX ALERT  | 

On April 16, 2015, the Large Business and International division of the IRS (LB&I) issued a directive (LB&I-04-0415-003) (the Directive) providing administrative guidance to agents conducting examinations of the repair versus capitalization issue under sections 162(a) and 263(a) with respect to costs incurred to maintain, replace or improve tangible assets used in a cable system that provides video, high-speed internet, and voice-over-internet-protocol services (cable system assets). The Directive follows the issuance of Rev. Proc. 2015-12 and reflects the two-year window taxpayers have to adopt or change to one or more of several safe harbor methods of accounting provided by the revenue procedure for determining the proper treatment of costs incurred with respect to cable system assets. The Directive is welcome news for taxpayers that incur costs to maintain, repair or improve cable network assets. Taxpayers that incur such are encouraged to evaluate existing methods to determine whether changing to one or more of the methods of accounting provided in Rev. Proc. 2015-12 are advisable.

Background

On Sept. 13, 2013, and Aug. 14, 2014, respectively, the IRS released final regulations regarding the treatment of costs to acquire, maintain and improve tangible property and final regulations on the dispositions of tangible property (collectively, "the regulations"). The regulations generally apply to a taxpayer's first taxable year beginning in 2014.

On Dec. 24, 2014, the IRS released Rev. Proc. 2015-12, providing various safe harbor methods of accounting for the treatment of costs incurred with respect to cable system assets. Specifically, the revenue procedure provides: (1) two alternative methods of accounting for determining whether expenditures to maintain, replace or improve cable system assets constitute capitalizable improvements versus deductible repairs; (2) two alternative methods of accounting for determining whether costs for customer drops and installation of customer premise equipment (CPE) constitute capitalizable improvements versus deductible repairs; and (3) a method of accounting for determining the asset and placed in service date for purposes of sections 167 and 168 for a fiber optic transfer node and trunk line consisting of fiber optic cable used in a cable distribution system. Finally, Rev. Proc. 2015-12 provides procedures for obtaining automatic consent to change to one or more of the methods of accounting contained in the revenue procedure and waives the scope limitations of sections 5.01(1)(d) and (f) of Rev. Proc. 2015-131  for a taxpayer that changes to the method of accounting provided in Rev. Proc. 2015-12 for its first or second taxable year ending after Dec. 31, 2013.

Discussion

The Directive, LB&I-04-0415-003 , provides a stand-down to agents conducting examinations of taxpayers on issues involving costs to maintain, replace or improve cable system assets. Specifically, the Directive instructs agents to discontinue examinations of the following issues (the "Issues"):

  1. Whether costs incurred to maintain, replace or improve cable network assets may be deducted under section 162 or must be capitalized under section 263(a)
  2. Whether costs incurred for customer drops and CPE installations may be deducted under section 162 or must be capitalized under section 263(a) or section 263A
  3. Any correlative issues involving the dispositions of structural components of a building or dispositions of cable network assets (other than a building or its structural components)

For taxable years ending before Jan. 1, 2014, examiners are instructed to discontinue current examinations of the Issues. For taxable years ending on or after Dec. 31, 2013, agents who are examining returns of cable companies are instructed to determine whether the taxpayer filed a Form 3115 to change to any of the methods of accounting provided in Rev. Proc. 2015-12. If the taxpayer has filed such a Form 3115, examiners are instructed to determine whether the change was consistent with Rev. Proc. 2015-12, including determining whether the section 481(a) adjustment was accurately computed and recognized.2  If the taxpayer has not changed to one or more of the applicable safe harbor methods of accounting provided by Rev. Proc. 2015-12 in its first taxable year ending after Dec. 31, 2013, examiners are instructed to refrain from examining any activity with respect to the Issues since taxpayers have until their second taxable year ending after Dec. 31, 2013, to change to the safe harbor methods under the revenue procedure. However, if the taxpayer has not changed to one of the safe harbor methods provided in Rev. Proc. 2015-12 by the second taxable year ending after Dec. 31, 2013, examiners are instructed to perform a risk assessment to determine the materiality of the repair deduction claimed with respect to the cable system assets.

Implications

The Directive is welcomed news for taxpayers that incur costs to maintain, repair or improve cable system assets. The Directive provides a temporary IRS stand-down for taxpayers currently under exam that have not yet adopted or fully implemented one or more of the safe harbor methods of accounting provided in Rev. Proc. 2015-12. Taxpayers with cable system assets should evaluate their existing methods to determine whether filing a Form 3115 to adopt one or more of the safe harbor methods of accounting in Rev. Proc. 2015-12 before the stand-down expires is advisable.

[1] Taxpayers with a tax year ending on or before Jan. 31, 2015, can still file for an accounting method change under Rev. Proc. 2011-14 with the scope limitations under section 4.02 waived.
[2] This includes determining whether the section 481(a) adjustment accounts for any previous section 481(a) adjustment resulting from a change in method for the treatment of expenditures cable system assets prior to the issuance of Rev. Proc. 2015-12.

AUTHORS


How can we help you?

Contact us by phone 800.274.3978 or
submit your questions, comments, or proposal requests.



Events/Webcasts

LIVE WEBCAST

Government contracting tax webcast

  • January 05, 2017

LIVE WEBCAST

What's next for BEPS: The multilateral instrument

  • December 14, 2016