Friday, April 28, 2017

California Announces Revision to Method Change Policy

Yesterday, the California FTB issued FTB Notice 2017-03. In this notice, the FTB announced that it was withdrawing FTB Notice 96-3 and will now follow the federal Rev. Proc. 2016-29. This notice was issued to clear up confusion regarding the application of Notice 96-3.

Overview. In FTB Notice 96-3, the FTB announced that it would not follow IRS Rev Proc 96-31. This revenue procedure allowed taxpayers to obtain automatic consent to change their accounting methods when they claimed less than the depreciation allowable. This procedure was republished with slight modifications in IRS Rev Proc 97-37. In IRS Rev Proc 98-60, the procedure was modified so that taxpayers could obtain automatic consent both when they claimed less than the depreciation allowable and when they claimed more. (With slight modifications, this procedure can now be found in section 6.01 of IRS Rev. Proc. 2017-30, which is the quite recent replacement of Rev. Proc. 2016-29.)  In FTB Notice 2000-8, the FTB announced their general policy under which taxpayers could obtain consent to change their accounting methods for California tax purposes. This notice was generally understood as permitting Federal method changes for California tax purposes under California's "deemed election" provisions of Revenue and Taxation Code sections 17024.5 and 23051.5 when there was no conflict between California and Federal tax laws, which was generally the case for non-C corp taxpayers seeking depreciation method changes.

In discussing the new notice with its author, I have learned that the FTB always took the position that Notice 96-3 applied only to Rev. Proc. 96-31 and did not apply to Rev. Proc. 97-37 and its successors. Therefore, the general understanding of Notice 2000-8 was the correct interpretation.

Practice Tips

1. The federal automatic consent change procedures are strict compliance procedures. See Hawse v. Comm'r, T.C. Memo 2015-99, at 22. Even though the IRS may not have rejected an automatic consent Form 3115, the taxpayer may not have received IRS consent to make the change. Id. at 24. Since California's deemed election rules require a "proper election filed with the Internal Revenue Service in accordance with the Internal Revenue Code or regulations", automatic consent Forms 3115 that comply with some, but not all, of the requirements of the automatic change procedures are vulnerable to FTB examination changes.

This is relevant to this topic because many depreciation method changes arise from cost segregation studies. In my experience, most practitioners omit some of the required statements for certain depreciation method changes. When filing a Form 3115 to implement a cost segregation study, practitioners most often omit the statement required under section 6.01(3)(b)(vii) of Rev. Proc. 2017-30 (and predecessors). (This section requires a statement of the facts and law supporting the new classification of each section 1245 asset.)

2. Taxpayers may continue to rely on FTB Notice 2000-8 to request different accounting methods for California purposes than the ones they elect for Federal purposes.

Thursday, May 5, 2016

New List of Automatic Changes

Since the Service severed the list of automatic changes from the procedural rules for automatic method changes, they are now free to more frequently update that list. Today that happened with the release of an advance copy of Revenue Procedure 16-29 (and just in time for the ABA Tax Section's May Meeting.) Practitioners should take care not to rely on this advance copy after the final version is published in the Internal Revenue Bulletin. After May 23rd, when googling Rev. Proc. 16-29, always remember to append "IRB" to the search.

Quick notes:

  1. Effective Date. The new rev proc is generally effective for Forms 3115 filed on or after May 5, 2016. 
  2. Transition Relief. Taxpayers with pending nonautomatic Forms 3115 filed before May 5, 2016 where the change now qualifies as automatic have until June 6, 2016 or, if later, the date of the letter granting or denying consent to make the change, to ask their National Office contact to change to the automatic consent procedures. The National Office will then send an acknowledgement letter. The taxpayer will then have until the earlier of 30 days from the date of that letter or date they must file the Covington copy of the Form 3115. For automatic changes that are now nonautomatic, the transition relief varies depending on the change.
  3. Significant changes.
    • Lots of housekeeping to remove defunct TPR provisions.
    • Changes to comply with section 267(a)(3) now are exempt from the five-year item and five-year overall method eligibility rules.
    • Changes to the PCM under section 1.460-4(b) are now nonautomatic.
    • Changes from all impermissible inventory valuation and identification methods under section 471 are now automatic. 
    • Certain depreciation-related method changes are now scoped out if the taxpayer claimed a tax credit on the item's cost.
    • New changes related to the Retail Inventory Method, section 195 start-up costs, and UNICAP interest capitalization.
    • An extension of the five-year item eligibility waiver for certain changes, mostly TPR-related. 

Wednesday, January 20, 2016

Final thoughts on Liveblogging the IRS TPR Webinar

The Service still dances around the big issue that Rev. Proc. 2015-56 brought to the world's attention, (though it has been discussed among practitioners for quite some time): How does section 263A work with section 263(a)? Is it an independent capitalization provision whose "installation" and "construction" rules trump the rules for repairs under the TPR? If so, how and when?

I expect this issue to be addressed at the ABA Tax Section Midyear Meeting in a couple of weeks, but, given the lack of even informal guidance from the Service, most taxpayers and practitioners will be left wondering how the rules work for some time. Speaking of the ABA Tax Section, the Capital Recovery & Leasing committee hosted a wonderful panel on this issue last fall at the ABA Tax Section Joint Fall Meeting.Unfortunately, the panel did not resolve how the two Code section interact. My impression was that, if taxpayer-favorable guidance is not forthcoming, this issue will be litigated sooner rather than later.

Even More IRS TPR Liveblogging

IRS is now clarifying what most of us took for a mistake in an answer by an IRS presenter at the previous presentation of this webinar. Shingles could be a capitalizable restoration or betterment in certain circumstances. But the replacement of just the shingles often would be a repair.

More liveblogging TPR Webinar

My first question gets answered re: RP 2015-20 and its presumptive use.  Merrill Feldstein says a post-2014 method change would be nonautomatic (until the expiration of the 5-year item eligibility rule) and that only 2014 and later costs would qualify.

To return to the possibility of the presumption being rebuttable, I think that many taxpayers will have a tough time demonstrating that the presumption does not apply. I have thoughts on how to do so, but can't cover while liveblogging.

Liveblogging the IRS TPR Webinar (Pt 3)

Jill El-Bendary of SBSE states that inventoriable items treated as nonincidental materials and supplies under Rev. Proc. 2002-28 are not eligible for the DMSH. The same applies to Rev. Proc. 2001-10.

Liveblogging IRS TPR Webinar (pt 2)

Merrill Feldstein of Chief Counsel says that taxpayers can amend returns back to 2012 to use the higher DMSH threshold if the DMSH was elected on the original return and the taxpayer had in place procedures at the beginning of that year to expense the item under its book policy (and did deduct it for book purposes).