Repairs and maintenance costs method change designated Tier I issue.

• Author: Salza, John

The IRS Large and Mid-Size Business (LMSB) Division has issued two industry director directives (IDDs) relating to situations in which a taxpayer changes its method of accounting to recharacterize costs previously capitalized under Sec. 263(a) as deductible repairs and maintenance expenses under Sec. 162. The first directive, IDD No. 1 (LMSB-4-0110-001), elevates repairs method changes to a Tier I issue for IRS examination purposes, a step that practitioners have long anticipated. The second directive, IDD No. 2 (LMSB-4-0110-002), issued concurrently with IDD No. 1, provides guidance to the field to effectively utilize resources in the examination of a taxpayer that changes its method of accounting to recharacterize previously capitalized costs as deductible repairs and maintenance expenses under Sec. 162.

Background

Introduced in 2006 as an element of LMSB issue management strategy, issue tiering is intended to strengthen the LMSB's ability to identify and prioritize certain issues in a coordinated manner, thereby providing consistent treatment among taxpayers. Tier I issues are of high strategic importance to the LMSB, have a significant impact on one or more industries, and generally involve a large number of taxpayers, a significant dollar amount, a substantial compliance risk, or high visibility. The IRS places issues in this category if it has an established legal position or LMSB directive published on the issue. In May 2008, the IRS issued a memorandum (LMSB-4-0509-019) notifying LMSB executives of an emerging issue relating to the recharacterization of costs previously capitalized under Sec. 263(a) as currently deductible repairs under Sec. 162. Citing a significant increase in Form 3115, Application for Change in Accounting Method, filings since mid-December 2008, many involving substantial Sec. 481(a) adjustments, the memorandum was widely viewed by practitioners as the first step toward elevating repairs method changes as a tier issue for IRS examination purposes. (For more on LMSB-4-0509-019, see Kay, "LMSB Identifies New Repairs Issue," 41 The Tax Adviser 15 (January 2010).)

In August 2009, this view was further reinforced when the IRS unexpectedly added the repairs method change to the list of automatic changes outlined in the appendix of Rev. Proc. 2008-52 (see Rev. Proc. 2009-39), but only under the added conditions that a third copy of the application be filed with the Ogden service center (presumably to enable better...