Wireless telecommunication assets

LB&I Control No: LB&I-4-1111-020
Impacted IRM 4.51.5

January 23, 2012

This memorandum provides direction to the field in the examination of depreciation deductions associated with certain tangible assets placed in service by wireless telecommunications carriers.  This directive is intended to provide a uniform format and approach for examiners to evaluate potential compliance risk related to this issue.

Background

In general, Internal Revenue Code (IRC) Section 167(a) provides that there is allowed as a depreciation deduction a reasonable allowance for the exhaustion and wear and tear of property used in a trade or business or held for the production of income.  The depreciation deduction provided by IRC Section 167(a) for tangible property placed in service after 1986 generally is determined under IRC Section 168, which prescribes two methods of accounting for determining depreciation allowances:  (1) the general depreciation system in IRC Section 168(a); and (2) the alternative depreciation system in IRC Section 168(g).

Revenue Procedure 87-56, 1987-2 C.B. 674, as clarified and modified by Revenue Procedure 88-22, 1988-1 C.B. 785, provides the class lives of property for computing the depreciation allowance under IRC Section 168.  This revenue procedure establishes two broad categories of depreciable assets: (1) asset classes 00.11 through 00.4, which consist of specific assets used in all business activities (asset categories); and (2) asset classes 01.1 through 80.0, which consist of assets used in specific business activities (activity categories).  The same item of depreciable property may be classified in both an asset category and an activity category, in which case the item generally is classified in the asset category.

A wireless telecommunication carrier has numerous tangible assets which are used primarily to provide wireless telecommunication services.  These wireless telecommunication assets are classified for depreciation purposes using various depreciation methods, recovery periods, and/or conventions.

To resolve this issue in a manner that conserves resources of both the Internal Revenue Service (Service) and taxpayers, the Service issued Revenue Procedure 2011-22, 2011-18 IRB 1, which provides a safe harbor method of accounting for the depreciation of certain tangible assets used by wireless telecommunications carriers.  Revenue Procedure 2011-22 is effective prospectively, for taxable years ending on or after December 31, 2010.

Use of the safe harbor included in Revenue Procedure 2011-22 is only permitted under the terms and conditions contained therein and should not be considered for purposes of resolving class life issues in prior open exam years.  This directive provides the guidance for addressing prior open exam years.

Planning and examination guidance – tax years ending before December 31, 2010

For tax years ending before December 31, 2010, examiners should discontinue any current examination of depreciation deductions associated with certain tangible assets placed in service by wireless telecommunications carriers.  This examination discontinuation only applies to positions taken on original returns filed for tax years ending before December 31, 2010.  Please contact the LB&I Issue Practice Group (IPG) for Deductible and Capital Expenditures for guidance on claims. 

The taxpayer will be allowed a two-year period to adopt the safe harbor recovery periods provided in Section 5 of Revenue Procedure 2011-22.  If the taxpayer has not adopted the safe harbor recovery period for its first or second taxable year ending after December 30, 2010, the examiner should follow the guidance under Planning and Examination Guidance – Tax Years Ending On or After December 31, 2010, as provided in the next section.

Discontinuing the examination of the depreciation expense should include the following steps:
 

• Revoke any outstanding Form 4564, Information Document Requests, relating to the development of the issue.
   
• Revoke any outstanding Form 5701, Notice of Proposed Adjustment, which proposed an adjustment to depreciation deductions for tangible assets used to provide wireless telecommunication services.
   
• Develop and issue a Form 886-A, Explanation of Adjustments, with the following language:

The Service neither accepts nor rejects the position stated in the tax return related to the depreciation deduction of wireless telecommunication assets.  [Insert taxpayer name] will be allowed a two-year period to adopt the safe harbor recovery periods discussed in Revenue Procedure 2011-22.  A change in method of accounting can be made in accordance with Section 7 of Revenue Procedure 2011-22 for all eligible assets, or one or more of the eligible assets listed in Section 3.  For those assets for which the safe harbor recovery period is adopted, the taxpayer’s method of accounting will be accepted without performing further examination procedures.    If [Insert taxpayer name] has not adopted the safe harbor recovery period for its first or second taxable year ending after December 30, 2010, the depreciation deduction will be subject to risk assessment and possible examination.

• If the taxpayer filed a Form 3115, Change in Method of Accounting, in the year(s) under examination, then include a statement that the Service neither accepts nor rejects the method described in the Form 3115.  In the year the taxpayer adopts the safe harbor method of accounting, the IRC Section 481(a) adjustment will be subject to risk assessment and possible examination, as described below under “True-Up Requirement”.  The Form 886-A should also include a statement that if the taxpayer has not adopted the safe harbor method within the two-year adoption period, the taxpayer’s accounting method and determination of the proper IRC Section 481(a) adjustment will be subject to risk assessment and possible examination.
   
• After the taxpayer has signed the Form 886-A, Explanation of Adjustments, upload the document into the Information Management System (IMS) to alert the subsequent examination team that the taxpayer was notified of the Service's position to discontinue the examination of the issue.   
   
• Complete a Form 5346, Examination Information Report, in accordance with the specific instructions provided for this issue, located on the LB&I IPG website for Deductible and Capital Expenditures. 

Planning and examination guidance – tax years ending on or after December 31, 2010

When examining returns of wireless telecommunication carriers for tax years ending on or after December 31, 2010, examiners should determine if an election was made in accordance with Section 5 of Revenue Procedure 2011-22 to adopt the safe harbor recovery periods for any assets listed in Section 3 of the Revenue Procedure.  Since the taxpayer may adopt the safe harbor recovery periods for all eligible assets, or one or more of the assets, the examining agent should determine if the taxpayer made the change in method of accounting for all eligible assets.  If so, the examiner should accept the depreciation deduction as filed.

If the taxpayer did not adopt the safe harbor recovery periods for all eligible assets or one or more of the eligible assets, and the two-year period to adopt the safe harbor recovery periods has expired, then the agent should perform a risk assessment to determine the materiality of the depreciation deduction claimed with respect to wireless telecommunication tangible assets.  If the results of the risk assessment are deemed to be material, the examiner should examine the deduction utilizing the following guidelines:

• In no event should the examiner accept a depreciation deduction based upon an asset description for which the recovery period is shorter than the recovery period found in the Safe Harbor.  In this instance, the examiner should adjust the corresponding depreciation deduction to the allowable Safe Harbor recovery period and make the appropriate IRC Section 481(a) adjustment.
   
• If the wireless telecommunication carrier claims a depreciation deduction based upon an asset description for which the recovery period is equal to the recovery period found in Safe Harbor, then the examiner should accept the depreciation deduction for that asset.   However, the examiner should ascertain whether the taxpayer properly adopted the recovery period being used and request documentation to verify that the appropriate IRC Section 481(a) adjustment was taken into account in the year of adoption.  If it was not, the examiner should make the appropriate IRC Section 481(a) adjustment.
• If the wireless telecommunication carrier claims a depreciation deduction based upon an asset description for which the recovery period is longer than the recovery period found in the Safe Harbor, then the examiner should not further pursue the depreciation classification for that asset.   

If the wireless telecommunication carrier claims a depreciation deduction which combines asset descriptions into one asset group, then the examiner should request that the taxpayer break down the asset group and depreciation deduction into asset descriptions that correspond to the asset descriptions in the Safe Harbor.  The examiner should then perform a risk assessment and determine if further examination is warranted, applying the above guidance.    

True-up Requirement.  When performing the risk assessment, the examiner should also consider if the IRC Section 481(a) adjustment was computed accurately.  If prior to the issuance of Revenue Procedure 2011-22 the taxpayer had filed a Form 3115, Change in Accounting Method, to change the treatment of depreciation expense associated with certain tangible assets placed in service by wireless telecommunications carriers, then the IRC Section 481(a) adjustment resulting from a change to the Rev. Proc. 2011-22 safe harbor method (“new IRC Section 481(a) adjustment”) should account for any previous IRC Section 481(a) adjustment (“old IRC Section 481(a) adjustment”).  The examiner should also ensure that the new IRC Section 481(a) adjustment properly accounts for depreciation expense that was computed under the taxpayer’s prior method in the interim years between the old and new IRC Section 481(a) adjustments.

Contacts

If you have any questions, please contact the LB&I IPG for Deductible and Capital Expenditures.

This directive is not an official pronouncement of law and cannot be used, cited or relied upon as such.

cc:  Commissioner, LB&I
       Deputy Commissioner, Operations
       Deputy Commissioner, International
       Division Counsel, LB&I
       Chief, Appeals
       Directors, Field Operations
       Director, Pre-Filing & Technical Guidance