Tier I Issue: Mixed Service Costs IDD 4 Phase I

June 19, 2009

LMSB-4-0509-022
Impacted IRM 4.51.2

   
Effective immediately, the status of the mixed service cost issue in tax years ending before August 2, 2005, is changed from active to monitoring.  In monitoring status, the mixed service cost issue can be resolved by examiners applying existing guidance without the extensive coordination required for issues in active status. 

Background/Strategic Importance:
The allocation of mixed service costs (MSC) under section 263A became a Tier I issue after more than sixty taxpayers (mostly utilities) filed requests to change their method of accounting for MSC from a “facts and circumstances” method to the Simplified Service Cost Method (SSCM) beginning in 2001.  See Treas. Reg. § 1.263A-1(h).  In the typical case involving an electric utility, the main effect of applying the SSCM is a significant decapitalization of costs allocable to self-constructed assets (SCA).  For tax years ending before August 2, 2005 (Phase I), the primary dispute is whether the SCA qualify as eligible property for the SSCM.  See Rev. Rul. 2005-53, 2005-2 C.B. 425.  For tax years ending on or after August 2, 2005 (Phase II), regulations prospectively resolve the question of eligibility by clarifying when SCA are considered to be produced on a routine and repetitive basis. T.D. 9217, 2005-2 C.B. 498 (Aug. 3, 2005).  In Phase II, the regulations require taxpayers using SSCM to change their method of accounting for MSC allocable to SCA to a “facts and circumstances” method, effectively reversing the tax benefits resulting from the change to the SSCM in Phase I. 

In LMSB’s tiered issue program, a Tier I issue remains in active status as the Issue Management Team (IMT) ascertains the scope of the issue and develops guidance for examiners, requiring a high level of coordination between the IMT and field personnel.  However, once adequate guidance with respect to an issue has been provided by ruling, regulation, or directive from the IMT, examiners can apply that guidance to resolve the issue without a high level of coordination.  At that point, the status of the issue should be changed from active to monitoring. 
 
The IMT believes that the guidance provided for the examination of the MSC issue in Phase I cases is sufficiently well established; extensive coordination for issues in active status is no longer necessary.  Accordingly, with the issuance of this directive, the status of the MSC issue in Phase I cases are changed from active to monitoring.  The active status of the MSC issue in Phase II cases is unaffected by this directive.  

Examination Guidance:
Field personnel examining the MSC issue in Phase I cases can apply the guidance provided by Treas. Reg. § 1.263A-1(h)(2)(i)(D) (before amendment by T.D. 9217, 2005-2 C.B. 498 (Aug. 3, 2005)).  Additional guidance can be found in Industry Director Directive #1, Industry Director Directive #2, and Industry Director Directive #3; dated June 8, 2006, May 1, 2007, and May 2, 2007, respectively.

Issue Tracking:
Field personnel with the MSC issue in Phase I cases should use the following UIL and SAIN codes:

Project Code 0511      Tracking Code 1511

Phase I Cases—Simplified Service Cost Method:

• UIL 263A-07-00
• SAIN 707
• Second Tier SAIN 190

Accuracy-related Penalty: 

• UIL 6662.00-00
• SAIN 624-01
• Second Tier SAIN 192

Contacts:
Questions regarding this directive should be addressed to the Utility Technical Advisor.

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

cc: Commissioner, LMSB
      Deputy Commissioner, LMSB Operations
      Deputy Commissioner, LMSB International
      Division Counsel, LMSB
      Chief, Appeals
      Directors, LMSB Field Operations
      Director, LMSB Performance, Quality and Audit Assistance
      Commissioner, SBSE
      www.irs.gov