The IRS Large Business & International Division has issued a memorandum (LB&I-04-0917-004) dealing with the classification of various types of mining equipment to determine units of property and major components under Reg. §1.263(a)-3(e).

The memo is meant to provide some consistently and eliminate confusion over what are units of property and major components of units of property for mining organizations.  However, since making use of definitions will likely change how an organization has been classifying items as units of property or major components, an entity wishing to make use of this provision will need to go through the procedures for a change of accounting method.

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Should a corporation that was required to incur certain costs to obtain regulatory approval for a merger be required to capitalize those costs as facilitative costs under IRC §1.263(a)-5(a)?  In Chief Counsel Advice 201713010 the IRS National Office decided the answer was no.

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The IRS has extended a special eligibility rule for taxpayers making an automatic change of accounting method by one year in Notice 2017-6. 

Taxpayers were required to make various changes in their accounting methods to comply with the revised tangible property regulations that took effect in 2014.  However, some of these taxpayers have discovered they need to make additional changes to comply with those regulations they had not noticed previously.

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The IRS has issued a revised 202 page Audit Technique Guide for Capitalization of Tangible Property that is meant to outline what agents should do in an examination when looking at the applying the regulations that took effect for tax years beginning on or after January 1, 2014 under IRC §263(a).

In CCA 201624021 the IRS considered whether the success-based fee safe harbor election under Revenue Procedure 2011-29 is available to a taxpayer to allocate success-based fees between actions that facilitate a transaction (expenses which must be capitalized) and those that do not (and may be currently be expensed) when the taxpayer elects to treat a stock sale as an asset sale under IRC §338(h)(10).

The election under IRC §338(h)(10) treats an acquisition of the stock of a target corporation as the purchase of the underlying assets from the acquired corporation, with the acquired corporation recognizing a gain immediately before the transaction. 

A payment made to settle a fraudulent conveyance claim is, in the view of the IRS National Office, a payment made to defend or protect title and thus must be capitalized under Reg. §1.263-2(e)(1).  [Chief Counsel Advice 201552028]

The issue arose with regard to claims made against a taxpayer for transfers made between a subsidiary and the parent entity.  Various parties with claims against the subsidiary asserted that the transfers of assets violated various fraudulent conveyance provisions and thus those assets (or an equivalent in value) should be made available to pay their claims.  The parent paid a sum of money to settle these claims and the question arose regarding whether a deduction can be claimed by the parent for the payments as ordinary and necessary business expenses under IRC §162.

The IRS took the interesting step of formally “blessing” a private letter ruling as “still valid” with regard to other taxpayers in Chief Counsel Advice 201549024.  That is interesting because a private letter ruling is only binding with regard to the taxpayer who requested it, but it illustrates the fact that this “somewhat but not quite formal” guidance is still important to understand.

The issue in this case relates to how enterprises deal with expenses related to Enterprise Resource Planning (ERP) software.  The IRS had issued PLR 200236028 that provided information on what the IRS position was the requirements to capitalize such costs and the periods over which the costs could be recovered. 

In Revenue Procedure 2015-56 the IRS provided a safe-harbor method that may be used by certain taxpayers operating a retail establishment or restaurant for remodel-refresh costs.

One key restriction is that this safe harbor may only be used by taxpayers that have applicable financial statements (AFP) as referred to in the tangible property regulations that took effect in 2014. Such statements are defined at Reg. §1.263(a)-1(f)(4)—and many small businesses will not have a statement.