Unit of property for network assets.

• Author: Holley, Darrin W.

In March 2008, Treasury issued proposed regulations under Secs. 162 and 263(a) providing guidance on the capitalization and deduction of costs relating to tangible property (REG-168745-03). Included in these regulations are the "repair regulations," a comprehensive set of rules for determining whether costs incurred for tangible property are deductible repairs or capital improvements. While these regulations offer extensive guidance on determining the unit of property for repair purposes, they do not define the unit of property for network assets.

Network assets are generally defined in the proposed regulations as railroad tracks, oil and gas pipelines, water and sewer pipelines, power transmission and distribution lines, and telephone and cable lines (Prop. Regs. Sec. 1.263(a)-3(d) (2)(iii)(C)). The IRS and Treasury have indicated that network asset guidance should be addressed industry by industry under the IRS's Industry Issue Resolution program. While they wait for the IRS to issue such guidance, taxpayers owning network assets--who frequently incur significant recurring costs for such assets--face considerable uncertainty as to the proper treatment of such assets for repair and maintenance purposes.

Technical Advice Memorandum (TAM) 200902011, which provides guidance on how a taxpayer with power transmission and distribution lines should determine "single, identifiable properties" in a casualty loss context, may have alleviated some of this uncertainty. The TAM notes the importance of the "unit of property" determination in a Sec. 165 casualty loss context because the amount of basis available to allow the deduction hinges on that definition. The importance of the unit of property definition is certainly not limited to casualty losses; it is prevalent across the Code for interest capitalization under Sec. 263A, for depreciation under Sec. 168, and certainly for repairs under Secs. 162 and 263(a), among others.

In the second footnote of the TAM, the IRS notes that it is using the term "unit of property" in the generic sense and that this unit of property determination for casualty loss purposes is not binding upon such determinations for other Code provisions. Taxpayers are wise to heed this advice because there are different determining factors for the different Code provisions cited above. For example, in Chief Counsel Advice 200827034, the taxpayer suggested an equivalency between the unit of property determinations under Sec...