Interest capitalization issues under Sec. 263A(f).

• Author: O'Driscoll, David

For tax years 1994-1997, T computed capitalized interest under the Sec. 263A(f) (UNICAP) rules using the tax year as its computation period, with monthly measurement dates. For 1998, T switched to quarterly measurement dates without first obtaining the IRS's consent. Also, during an examination of 1997 and 1998, T sought to recalculate its capitalized interest for 1997 using quarterly measurement dates.

T capitalized interest expense for the construction of a new headquarters during 1997 and 1998. It determined its accumulated production expenditures (APEs) at each monthly measurement date by totaling the costs of the headquarters project incurred through the measurement date and subtracting 33% of such cost a to reflect the cost a of Sec. 1245 property, which T argues should be excluded from it a APEs.

Measurement Dates

The first issue is whether the measurement dates used in the calculation of capitalized interest is an accounting method subject to Secs. 446 and 481. Under Regs. Sec. 1.263A-9(f)(2), T can modify its choice of measurement dates from one tax year to another; any such change is not a change in accounting method to which Secs. 446 and 481 apply T is thus not required to seek IR.S consent before changing its measurement dates from year to year.

However, once T chooses its measurement dates and files its return on that basis for a tax year, the doctrine of election generally prohibits it from subsequently altering its choice of measurement dates. The doctrine of election, as it applies to Federal tax law, consists of two elements: (1) a free choice between two or more alternatives and (2) an overt act by which a taxpayer communicates the choice to the IRS. A taxpayer who makes such an election may not, without the IRS's consent, retroactively revoke or amend it merely because another alternative appears to be more advantageous (Pacific National Co., 304 U.S. 191 (1938)).

In this case, T had a free choice of measurement dates for each tax year, and it communicated its choices to the IRS by means of its filed returns. Absent some special circumstances (which do not appear in the facts submitted), T is bound by its choices of measurement dates, and cannot modify them after they are made.

Real vs. Tangible Personal Property

The examiner argues that certain costs identified by T as Sec. 1245 property were real property for Sec. 263A(f) purposes and should not have been excluded from the calculation of APEs for the headquarters...