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IRS Extends Time to Make Late Partial Asset Disposition Election.
(Parker Tax Publishing September 29, 2014)

Last week, the IRS released Rev. Proc. 2014-54 the last bit of expected guidance in the multi-year overhaul of the tax rules on tangible property. Rev. Proc. 2014-54 provides the procedures taxpayers must follow to obtain automatic IRS consent for certain accounting method changes relating to tangible property dispositions.

Prior tangible property guidance has been controversial at times, and often contained changes to the applicable dates to which the rules applied. With respect to changing deadlines, Rev. Proc. 2014-54 is no exception. But, similar to prior changes, the deadline change in Rev. Proc. 2014-54 is favorable to taxpayers because it extends by one year the deadline for making a late partial disposition election and having it treated as an automatic accounting method change.

Practice Tip: One of the more important changes made in the 2013 proposed regulations and 2014 final regulations was the addition of a partial disposition rule. Under that rule, taxpayers can claim a loss on the disposition of a structural component (or a portion thereof) of a building or upon the disposition of a component (or a portion thereof) of any other asset without identifying the component as an asset before the disposition event. The rule minimizes circumstances in which an original part and any subsequent replacements of the same part are required to be capitalized and depreciated simultaneously. In Rev. Proc. 2014-17, the IRS allowed taxpayers to make a late partial disposition election where they had not timely made such an election under the proposed regulations. However, the election could only be made for any tax year beginning on or after January 1, 2012, and beginning before January 1, 2014. In Rev. Proc. 2014-54, the IRS extends the timeframe for making the election to any tax year beginning on or after January 1, 2012, and beginning before January 1, 2015.

In addition to extending the time for making a late partial disposition election, Rev. Proc. 2014-54 provides for other changes, including additional accounting method changes, as a result of the final property disposition regulations issued this past August.

Practice Tip: Practitioners need to review the current fixed asset accounting policies of their clients to see if they are in compliance with the final regulations and determine if making a late partial disposition election will benefit their clients. For most clients, the automatic accounting method change rules will apply to a late partial disposition election. However, Form 3115 will still need to be filed.

Background

Code Sec. 263 provides the general rules for the tax treatment of capital expenditures. However, determining whether expenditures are for capital improvements or for ordinary repairs is a highly factual determination. Recognizing that the standards for applying Code Sec. 263 were difficult to discern and apply in practice and led to considerable uncertainty and controversy for taxpayers, the IRS embarked on a decade-long mission to revise the rules and give more certainty to taxpayers on how to account for such expenditures. That mission began on January 20, 2004, when the IRS issued Notice 2004-6 announcing an intention to issue regulations providing guidance in this area. After a period of public comment, the IRS issued temporary regulations in December 2011.

Subsequently, additional guidance in the form of proposed regulations, technical amendments, and revenue procedures were issued. The last set of regulations was issued on August 18, when the IRS finalized the rules under Reg. Secs. 1.168(i)-1, 1.168(i)-7, and 1.168(i)-8 on dispositions of tangible depreciable property subject to Modified Accelerated Cost Recovery System (MACRS) depreciation. The final regulations not only provide rules for determining gain or loss upon the disposition of MACRS property, they also provide rules for identifying the asset disposed of and accounting for partial dispositions of MACRS property.

Compliance Tip: The final regulations apply to tax years beginning on or after January 1, 2014. With respect to tax years beginning on or after January 1, 2012, and before January 1, 2014, taxpayers have three choices as to the rules they can apply: (1) the rules under the final regulations; (2) the rules under the 2013 proposed regulations; or (3) the rules under the temporary regulations.

In March, the IRS issued Rev. Proc. 2014-17, which modified the rules in the Appendix of Rev. Proc. 2011-14 for obtaining automatic IRS consent to: (1) change a method of accounting for dispositions of tangible depreciable property; (2) change a method of accounting for depreciation of MACRS property; and (3) change a method of accounting for the treatment of general assets accounts. The issuance of final regulations in August on the tax treatment of dispositions of tangible property necessitated the issuance of Rev. Proc. 2014-54.

OBSERVATION: Generally, to change a method of accounting a taxpayer must receive the consent of the IRS. However, the IRS periodically issues revenue procedures in which it provides the procedures a taxpayer must follow in order to automatically obtain IRS consent to make a particular accounting method change. These procedures update the Appendix of the current accounting method change procedure, currently Rev. Proc. 2011-14. The general rules for making an accounting method change are spelled out in the body of Rev. Proc. 2011-14, and the Appendix describes the specific accounting method changes to which a subsequent revenue procedure applies.

Additional Accounting Method Changes Provided in Rev. Proc. 2014-54

In Rev. Proc. 2014-54, Sections 6.38 through 6.40, the IRS provides for the following three additional automatic accounting method change procedures:

(1) certain accounting method changes for disposing of a building or a structural component or disposing of a portion of a building (including its structural components) to which the partial disposition rule applies;

(2) changes in the method of accounting for disposing of Code Sec. 1245 property or a depreciable land improvement or disposing of a portion of Code Sec. 1245 property or a depreciable land improvement to which the partial disposition rule applies;

(3) a change in method of accounting for disposing of an asset subject to a general asset account election under Code Sec. 168(i)(4) and the applicable regulations.

With respect to the change in (3) above, the IRS noted that this change also may affect the determination of gain or loss from disposing of the asset and may affect whether the taxpayer must capitalize amounts paid to restore a unit of property

Late Partial Disposition Election

The most important change in Rev. Proc. 2014-54 is found in section 6.33 and involves the timing of the late partial disposition election. The IRS will treat the making of the late election under Rev. Proc. 2014-54 as a change in method of accounting. As previously noted, a taxpayer may make this change for any tax year beginning on or after January 1, 2012, and beginning before January 1, 2015. In addition, Rev. Proc. 2014-54 provides that the scope limitations, which generally act to prevent a taxpayer from taking advantage of automatic consents to change a method of accounting, do not apply to a taxpayer making a late partial disposition election.

A partial disposition election can benefit taxpayers who have disposed of a portion of an asset but are continuing to depreciate that asset. As illustrated in the examples below, the partial disposition election will allow them to change from depreciating the asset to recognizing gain or loss on that disposition.

Example: ABC Company, a calendar year taxpayer, acquired and placed in service a truck in 2009. The truck is described in asset class 00.242 of Rev. Proc. 87-56. ABC depreciates the truck under MACRS and does not reasonably expect to replace the engine of the truck more than once during its class life of six years. The engine is a major component of the truck. In 2012, ABC replaced the engine of the truck and applied Reg. Sec. 1.168(i)-8T and Reg. Sec. 1.263(a)-3T for its 2012 tax year. Because the truck is the asset for disposition purposes, ABC did not recognize a loss on the retirement of the engine and continues to depreciate the original engine. Further, ABC capitalized the new engine as an improvement, classified the new engine under asset class 00.242 of Rev. Proc. 87-56, and is depreciating the new engine under MACRS. ABC decides to apply Reg. Sec. 1.168(i)-8 (the final regulation issued in August on accounting for dispositions of MACRS property) beginning with its 2013 tax. ABC also decides to make the late partial disposition election for the truck's original engine that ABC retired in 2012. Although the truck is the asset for disposition purposes, the partial disposition results in the retirement of the engine being treated as a disposition. Thus, in accordance with Rev. Proc. 2014-54, ABC may file a Form 3115 with its 2013 federal income tax return to make the late disposition election for the engine and change from depreciating that original engine to recognizing a loss upon its retirement.

Section 6.33 of Rev. Proc. 2014-54 provides that the extension of the automatic accounting method change for a late partial disposition election does not apply to the following:

(1) a taxpayer who makes a late partial disposition election under the proposed regulations but who does not apply all the provisions of the applicable proposed regulations;

(2) any asset of which the disposed portion was a part that is not owned by the taxpayer at the beginning of the year of change;

(3) a taxpayer making any late election after the time period allowed in which to make the election (as specified in Section 6.33(3) of the APPENDIX to Rev. Proc. 2011-14); or

(4) the partial disposition election specified in Reg. Sec. 1.168(i)-8(d)(2)(i) (relating to certain asset classifications) that is made pursuant to Reg. Sec. 1.168(i)-8(d)(2)(iii), or in Prop. Reg. Sec. 1.168(i)-8(d)(2)(i) that is made pursuant to Prop. Reg. Sec1.168(i)-8(d)(2)(iii).

Additional Modifications Made by Rev. Proc. 2014-54 to Rev. Proc. 2011-14

As noted above, after the final tangible property disposition rules were issued in August, a new procedure was necessary to guide taxpayers on how to effect certain accounting method changes and to eliminate procedures that no longer apply. As a result, in addition to modifying the rules in the Appendix of Rev. Proc. 2011-14, Rev. Proc. 2014-54 also modifies the Appendix by:

(1) removing Section 6.19 (lessor improvements abandoned at termination of lease) because it is obsolete; revising Section 6.29 (disposition of a building or structural component) to provide that such provision does not apply to any demolition of a structure to which Code Sec. 280B and Reg. Sec. 1.280B-1 apply;

(2) revising Sections 6.32 (general asset account elections), 6.34 (revocation of a general asset account election), and 6.35 (partial dispositions of tangible depreciable assets to which the IRS's adjustment pertains) to allow these changes in method of accounting to be made under Code Sec. 1.168(i)-1 or Reg. Sec. 1.168(i)-8;

(3) revising Section 6.37 (permissible to permissible method of accounting for depreciation of MACRS property) to provide additional changes in method of accounting that are consistent with Reg. Sec. 1.168(i)-1 or Reg. Sec. 1.168(i)-8; and

(4) revising Section 10.11 (tangible property) to clarify that this provision in the Appendix, which deals with accounting method changes for supplies and materials, does not apply to amounts paid or incurred for certain materials and supplies that the taxpayer has elected to capitalize and depreciate under Reg. Sec. 1.162-3(d) or Reg. Sec. 1.162-3T(d).

Rev. Proc. 2014-54 also includes charts summarizing the changes in methods of accounting that may be made under Rev. Proc. 2011-14 for dispositions of MARCS property and charts that summarize the late elections under the current and proposed Reg. Secs. 1.168(i)-1 and 1.168(i)-8 that are treated as a change in method of accounting. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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