LMSB Identifies New Repairs Issue

By Sharon Kay, CPA, Washington, DC

Editor: David J. Kautter, CPA

In an IRS Large and Mid-Size Business (LMSB) Division memorandum (LMSB-4-0509-019), the IRS notified LMSB executives of an emerging issue relating to the recharacterization of costs associated with tangible assets previously capitalized under Sec. 263(a) as currently deductible repairs under Sec. 162.

The IRS noted that since mid-December 2008, it has seen a significant increase in filings of Form 3115, Application for Change in Accounting Method, requesting a change in accounting method for compliance assurance process cases, coordinated issue cases, and industry cases using the advance consent procedures under Rev. Proc. 97-27. The accounting method change requests involve substantial Sec. 481(a) adjustments, refer to Secs. 263(a) and 162, and specify “repairs” as the change requested.

While the issue varies based on the industry, the IRS indicates that each variation involves an expansive change in the designation of the unit of property. Although the memo states that unit of property issues may be categorized as network asset issues, store remodeling issues, or general issues involving real property, it does not provide detail regarding what the specific issue is regarding the unit of property. The IRS advises its examination teams to analyze the details for the substantive issue to determine whether the expenditures included in the Sec. 481(a) adjustment are deductible under current law, which may require the assistance of an engineer. The IRS also notes that the proposed tangible asset regulations are clear that the final regulations will apply to tax years beginning on or after the date they are published.


This memo is likely a first step toward characterizing repairs method changes as a tier issue for IRS examination purposes. It raises awareness among examining agents to pay particular attention to the method changes for repairs because they may have merit in part, which seems to create a negative implication. The memo focuses on the determination of the unit of property as an issue and states that the method changes involve an “expansive” change in the definition of unit of property. Currently, Rev. Proc. 2009-39 makes most repairs method changes automatic but does not provide audit protection on the unit.


David Kautter retired from Ernst & Young LLP in Washington, DC, in December 2009.

Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP.

For additional information about these items, contact Mike Dell at (202) 327-8788 or michael.dell@ey.com.

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