American Gas Association Repairs Technical Update

1. American Gas Association Repairs Technical Update June 29, 2010

2. Repairs – Status of Forthcoming Regulations • Proposed Regulations under Section 263(a) • Delayed until late 2010 • Frequent technical meetings by regulation drafters continuing • Mix of final, proposed and temporary regulations • Many issues still under consideration, including unit of property, “betterments”, “restorations”, and repair allowance, for example • Possibly no section 481(a) adjustment

3. Repairs – Technical Update • Rev. Proc. 2009-39 • Accounting method change for repair and maintenance costs automatic (new Appendix section 3.06) • Accounting method change for dispositions of structural components of buildings under Section 168 automatic (new Appendix section 6.24); also, Appendix section 6.25 contains similar change procedure for tangible personal property and land improvements. Both provisions are for taxpayers that desire “to change to a unit of property that is permissible” for determining when a disposition of such unit has occurred. • No audit protection on the unit of property in this context • Expanded definition of “under examination” to include refund under review by Joint Committee on Taxation (new section 3.08(5))

4. Repairs – Tier 1 Status • How and why repairs became a Tier 1 issue • Issuance of Proposed regulations in 2006 • Hundreds of Form 3115 filings to expense previously capitalized repair costs, many with significant adjustments • May 2009 IRS LMSB emerging issue alert • Capitalization issues will continue to be a prevalent theme both in in the context of repairs and depreciation for the foreseeable future

5. Repairs – Tier I Status • Two IRS Director Directives issued in January, 2010 • First Directive • Outlines procedures for examining the issue and involvement of industry technical advisors and specialists • Requires examiners to address unit of property determinations for all industries • Focus on remodel and renovation issues in gaming, retail and restaurant industries

6. Repairs – Tier I Status • Second Directive • Examiners not prohibited from examining re-characterization once automatic or advance consent effective for method change • Examiners may challenge factual representations – including unit of property determinations • IRS may attempt to challenge taxpayers on unit of property issues even if a ruling letter has been issued stating the unit(s) of property

7. Tier I Implications • On exam, IRS has consistently been unwilling or unable to resolve unit of property issues in many cases (e.g., even in the context of routine building repairs) • As a result, the IRS has resolved cases on other grounds • By agreeing to accept certain categories of repairs or • Accepting an agreed upon percentage of the adjustment Result: Uncertainty in some cases as to the new method

8. Tier I Implications • IRS has encouraged taxpayers to pursue pre-filing agreements and seek formalized industry issue resolution • Examination experiences including “CAP” taxpayers

9. Repair IDR’s • Issues raised by the IRS on examination: • Unit of property (including identification of a “major component or substantial structural part”) • Difficulty in distinguishing between depreciable costs and repairs in the context of a cost segregation study; desire to modify prior IRS directives regarding cost segregation • Material increase in value • Appreciably prolonging useful life • New or different use • Plan of rehabilitation

10. Retirements • Treasury appears likely to address retirements as part of the final 263(a) tangible property regulations package; • Guidance will entail interpretation of sections 168 and 165 • CCA 201016054 (12/9/2009) : “…what is the asset (the unit of property or “UOP”) for depreciation and retirement purposes may not be the same as the UOP for repair capitalization purposes.