Change in accounting method request does not qualify for audit protection.

• Author: Rohrs, Jane

The IRS has ruled in technical advice (TAM 200738014) that a service provider's request for a change in accounting method for mixed service costs does not qualify for audit protection because the service provider received written notification, citing the treatment of mixed service costs as an issue under consideration.

Facts

The taxpayer used an overall accrual method and a calendar tax year. On September 11,2003, the taxpayer submitted a Form 3115, Application for Change in Accounting Method, requesting permission to change its accounting method for self-constructed property under Sec. 263A. This Form 3115 was filed under the automatic consent procedures of Rev. Proc. 2002-9.

On the Form 3115, the taxpayer proposed to allocate mixed service costs under the simplified service cost method for all qualified property using the labor-based allocation ratio allowed by Regs. Sec. 1.263A-1(h)(4).The taxpayer included in its Form 3115 an explanation of the legal reasoning supporting the proposed change that discussed its qualification to use the simplified service cost method for its mixed service costs and its position on the issue of when assets are produced on a routine and repetitive basis. The taxpayer's Form 3115 reflected a Sec. 481(a) adjustment that was reported on its 2003 federal income tax return.

On or about February 13, 2004, the taxpayer fried a superseding Form 3115 related to the same method of accounting for which the prior Form 3115 was filed. This change was filed under the advance consent procedures of Rev. Proc. 97-27.

In April 2005, the taxpayer was placed under examination. The examining team indicated that the taxpayer's automatic accounting method change for self-constructed property would be audited and advised the taxpayer that the IRS was looking into the issue of self-constructed property under the uniform capitalization rules of Sec. 263A with other taxpayers throughout the country in services and related industries. The Service issued a number of information document requests (IDRs), which related to the automatic method change and three claimed adjustments (Affirmative Issues 1-3).

In August 2005, the Service issued Rev. Rul. 2005-53 (2005-2 CB 425), which clarified the types of property that qualify as eligible under Regs. Secs. 1.263A-1(h)(2)(i)(D) and 1.263A-2(b)(2)(i)(D) and how the terms "routine and repetitive" are interpreted for that purpose. The Service then issued final and temporary regulations (TD 9217)...