LB&I Division Issues Memorandum on Units of Property and Major Components for Mining Industry

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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Expenditures Required by Regulatory Agency to Obtain Approval for Merger Were Not Automatically Required to Be Capitalized

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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Relief Extended By One Year to Make Certain Accounting Method Change Requests Under Automatic Procedures to Comply with Tangible Property Regulations

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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Target Corporation in Section 338(h)(10) Election May Not Adopt Safe Harbor Success-Based Fees Allocation Under Revenue Procedure 2011-39

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. 

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Payments to Settle Fraudulent Conveyance Claim Must Be Capitalized

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.

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Analysis Found in 2002 PLR Represents Proper Treatment of ERP Software Costs in the View of the IRS Chief Counsel's Office

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. 

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IRS Critiques Taxpayers' Attempt to Compute Adjustment for Late Partial Disposition

In Field Attorney Advice 20154601F the IRS critiqued a taxpayer’s application of the partial disposition rules contained in the proposed tangible property regulations at Proposed Reg. §1.168(i)-8 which are very similar to those contained in the currently applicable final regulations.

In the case in question the taxpayer was attempting to use those regulations to claim a loss on partial dispositions of buildings the taxpayer owned using the late partial disposition election available for a change in method to the revised tangible property regulations.

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De Minimis Safe Harbor Invoice Cost Raised to $2,500 for Taxpayers Without an Applicable Financial Statement

In Notice 2015-82 the IRS has increased the invoice cost limits for taxpayers without an applicable financial statement to $2,500 for the de minimis safe harbor under the tangible property regulations that took effect for tax years beginning in 2014.

Under Reg. §1.263(a)-1(f) a taxpayer may annually elect to apply the de minimis provisions that, effectively, “bless” a taxpayer’s capitalization policy up to certain limits on a per invoice level. 

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Safe Habor Allocation of Refresh-Remodel Costs for Retail and Restaurants Provided by IRS

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.

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Simplified Accounting Method Change Procedures Issued by IRS for Small Taxpayers to Comply with Repair/Tangible Property Regulations

Facing mounting pressure from various parties to grant relief, the IRS has provided an optional “simplified” method of complying with the new repair/tangible property capitalization regulations in Revenue Procedure 2015-20.  In addition to issuing the ruling, the IRS also issued a press release (IR-2015-29) describing the relief.

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