Statistical sampling and the new tangible property revenue procedures.

• Author: Batcher, Mary

The Internal Revenue Service's recent tangible property regulations pose significant challenges for taxpayers. (1) The mechanics of complying with the new rules are addressed in in two IRS revenue procedures, Revenue Procedures 2012-19 and 2012-20. (2) This article discusses not the tax aspects of these revenue procedures, but rather the statistical sampling requirements and the implications for taxpayers.

The revenue procedures include several references to the appropriateness of statistical sampling to determine deductions and other tax treatments under the tangible property regulations. Common situations where statistical sampling is expressly recognized as an appropriate methodology include determining repair and maintenance deductions, materials and supplies deductions, and deductions for rotable and spare parts. The statistical sampling approach must be consistent with the guidance provided in Revenue Procedure 2012-42. (3)

Revenue Procedure 2011-42 describes simple random and stratified sampling and lists four estimation procedures as appropriate, albeit with limitations on the use of two of them. In simple random sampling, items are randomly selected until the desired sample size is reached using random numbers to determine whether an item is selected or not. In stratified sampling, the population is divided into buckets or strata and a simple random sample is selected in each stratum. In both types of sampling, the probabilities of selection must be known and nonzero for every item in the population. Revenue Procedure 2011-42 does not authorize the use of non-statistical or judgment sampling, which is characterized by subjective selection of items into the sample.

The statistical sampling language in Revenue Procedures 2012-19 and 2012-20 is, as follows:

By following the sampling procedures provided in Rev. Proc. 2011-42, 2011-37 I.R.B. 318, a taxpayer changing its method of accounting under section X.XX of the APPENDIX may use statistical sampling in determining the [section] XXXX. Sampling methodologies not described in Rev. Proc. 2011-42 are not permitted. The latter quoted sentence has been interpreted by some as allowing only the specific sampling and estimation methods explicitly described in Revenue Procedure 2011-42. Those approaches, however, will not work in all situations and there are other equally, valid types of sampling and estimation that are not described in the sampling revenue procedure. Revenue Procedure 2011-42...