IRS provides safe-harbor methods of accounting to cable system operators.

• Author: Clark, Nathan P.

The IRS concluded its long journey toward clarity in defining capitalization of improvements versus repair and maintenance costs when it issued final tangible property regulations in 2013 (T.D. 9636). However, not all industries received the same degree of finality of guidance in the regulations. The IRS continues to provide guidance for certain industries through its Industry Issue Resolution program, addressing capitalization issues and challenges unique to certain industries.

Recently, the IRS issued Rev. Proc. 2015-12 to provide guidance and several safe-harbor methods of accounting for cable system operators that provide video, high-speed internet, and voiceover-internet-protocol (VoIP) phone services through a "cable network." A cable network is an expansive system of interconnected assets covering one or more geographically contiguous regions or proximate customer populations that receive cable services from a cable operator. The cable network consists of property that receives signals at the "headend" from satellite antennae or fiber-optic cable and conveys the signals to customer premises using optic transmission and receiver devices, fiber-optic cable, hubs, fiber-optic transfer nodes, coaxial cable, amplifiers, taps, and customer drops.

The Industry Issue

Cable operators incur significant costs to maintain, replace, and improve real and personal cable network property. Whether these costs are deducted as repairs under Sec. 162 or capitalized as improvements under Sec. 263(a) depends on whether the costs are for a betterment or restoration to a unit of property, or adapt a unit of property to a new or different use. Cable operators and the IRS often have difficulties identifying the units of property that constitute these networks and disagree over whether the cost to replace a particular item is an improvement that operators must capitalize.

Disagreements between cable operators and the IRS also extend to the proper depreciation classification of cable network assets. Rev. Proc. 2015-12 clarifies and extends to cable operators prior guidance in Rev. Proc. 2003-63 for determining whether network assets are used for providing one-way or two-way communication services. One-way communication assets are depreciated pursuant to Rev. Proc. 87-56 under asset class 48.42 (CATV-Subscriber Connection and Distribution Systems) over a seven-year recovery period, while two-way communication assets are depreciated over a 15-year period pursuant...