TEI comments on tangibles regs, Form 5471, and section 263 transaction costs: also Files Amicus Brief in MeadWestvaco.

• Position: Recent Activities

Issues ranging from the 12-month rule in the tangibles regulations to the revision of an information-reporting form to the unitary business principle captured TEI's attention during the dog days of summer. TEI's new President, Bob McDonough, who took office on August 14, commented that the variety of technical activities demonstrated the breadth and depth of TEI's advocacy efforts.

Tangibles Regulations

Following up on a question raised during TEI's winter liaison meetings with the Treasury Department, TEI in June addressed whether a taxpayer's treatment of an item in its applicable financial statement (AFS) is an appropriate measure for determining whether an acquired or produced unit of property has a life of 12 months or less. The Institute--together with other commentators--had taken issue with a Treasury decision in the proposed regulations to equate the economic useful life of an asset with the taxpayer's AFS or "book" life for purposes of determining whether an expenditure should be capitalized as a restoration.

In comments filed with the Treasury Department on June 19, TEI explained that the current regulations under sections 263(a), 446, and 461 of the Internal Revenue Code require taxpayers to capitalize amounts paid to acquire property having a useful life substantially beyond the taxable year. Because some courts have adopted a 12month rule for determining whether property has such a useful life, the proposed regulations adopted a bright-line 12-month rule for determining whether amounts paid to acquire or produce a tangible unit of property must be capitalized. TEI recommended retaining the current rules rather than adopting an AFS conformity rule.

"The current capitalization rules generally afford taxpayers flexibility in determining whether an expenditure has a useful life 'substantially beyond the taxable year,'" TEI stated, adding that the proposed 12-month rule would transform a flexible judicial guidepost for capitalization into an inflexible per se rule.

Acknowledging that bright-line rules often have appeal, the Institute opposed the adoption of a rule mandating that taxpayers follow their AFS life to determine whether capitalization is required. "The proposed bright-line rule," TEI averred, "would preclude the tax department from adjusting" the tax treatment on the tax return and require the adjustment to be made directly in the books. For many taxpayers,, the materiality threshold for adjusting an improperly...