The LB&I Directive replaces a March 2012 directive announcing a two-year “stand-down” of IRS examination activity with respect to certain capitalization issues. See TaxNewsFlash-United States (March 15, 2012)
The new LB&I Directive states that since the mandatory effective date of the so-called “Repair Regulations” (December 2011) has been deferred until tax years beginning on or after January 1, 2014 (while remaining optional for 2012 and 2013 tax years), the IRS is:
- Modifying the instructions for examining tax years beginning or or after January 1, 2012, and before January 1, 2014, and
- Restating prior examination instructions for tax years beginning before January 1, 2012, and on or after January 1, 2014
Read the updated guidance: LB&I Control No. LB&I-04-0313-001 (dated March 22, 2013, and posted March 27, 2013)
Despite the delayed mandatory effective date of the Repair Regulations, the new LB&I Directive does not extend the current stand-down period or broaden its scope. Instead, as under the earlier directive, IRS examination teams are instructed to “apply the regulations in effect and follow normal examination procedures” for tax years beginning on or after January 1, 2014.
The revised LB&I Directive specifically provides exam guidance with respect to the capitalization vs. repair issue for tax years:
- Beginning before January 1, 2012
- Beginning on or after January 1, 2012, but before January 1, 2014, and
- Beginning on or after January 1, 2014
Under the updated LB&I Directive—
- LB&I exam teams are instructed to “stand-down” on the examination of repairs issues in years beginning prior to January 1, 2012, including the treatment of “correlative” issues involving structural component and tangible depreciable property dispositions. No other issues are included in the stand-down, including for example, the treatment of costs incurred to purchase materials and supplies, or method changes involving the depreciation of tangible property.
- If taxpayers make an accounting method change to comply with the temporary regulations in tax years beginning on or after January 1, 2012, but before January 1, 2014, the IRS may examine the issue; otherwise, the IRS will not examine these issues in this period.
- For tax years beginning on or after January 1, 2014, the LB&I Directive instructs the examiner to apply the regulations in effect and follow normal exam procedures.
- The LB&I Directive makes clear that it does not require a stand-down on issues for which separate guidance is provided (e.g., track maintenance allowance and the revenue procedures issued under the IRS’s Industry Issue Resolution (IIR) program for repair and maintenance costs incurred in the telecommunications, electric utility, and utility transmission and distribution (T&D) industries).
A reminder—the LB&I Directive only applies to taxpayers at examination, not in matters before IRS Appeals.
For more information, contact a tax professional with KPMG’s Washington National Tax: