SECTION 4. SAFE HARBOR METHOD

OF ACCOUNTING FOR ROTABLE SPARE PARTS

.01 In General . This section 4 describes a safe harbor method of accounting for rotable spare parts. A taxpayer is eligible to use the safe harbor method of accounting in any taxable year in which the taxpayer (a) is within the scope of section 3 of this revenue procedure; and

(b) has gross sales (less returns) of rotable spare parts from the taxpayer’s maintenance operation that do not exceed 10 percent of the taxpayer’s total gross revenues (less returns) from its maintenance operation for the taxable year.

.02 Description of Safe Harbor Method of Accounting . A taxpayer using the safe harbor method of accounting for rotable spare parts must —

(1) capitalize the cost of the rotable spare parts under § 263(a) and depreciate these parts under § 168 in accordance with section 4.03 of this revenue procedure;

(2) establish one or more pools for the rotable spare parts in accordance with section 4.04 of this revenue procedure;

(3) identify the disposed rotable spare parts in accordance with section 4.05 of this revenue procedure; and

(4) determine the depreciable basis of the rotable spare parts for depreciation purposes in accordance with § 167(c), § 1011, and § 1.168(b)–1(a)(3) and (a)(4).

.03 Depreciation Allowable . (1) In general . For purposes of determining the depreciation allowable for the rotable spare parts under the safe harbor method of accounting described in section 4.02 of this revenue procedure, the applicable depreciation method for the rotable spare parts is determined under § 168(b)(1) or (2), as applicable, unless either (a) the taxpayer made a timely valid election under § 168(b)(5) to use the straight line method of depreciation for the class of

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in accordance with section 4.04(1) of this revenue procedure and change to a method of accounting described in section 4.05(2) of this revenue procedure for identifying the disposed rotable spare parts.

.02 Automatic Change . A taxpayer within the scope of this revenue procedure is granted the consent of the Commissioner to make a change in method of accounting described in section 5.01 of this revenue procedure provided that the taxpayer follows the automatic change in method of accounting provisions in Rev. Proc. 2002–9 (or any successor), with the following modifications:

(1) The scope limitations in section 4.02 of Rev. Proc. 2002–9 do not apply to a taxpayer that wants to make the change in method of accounting for its first or second taxable year ending on or after December 31, 2006, provided the taxpayer’s method of accounting for rotable spare parts is not an issue under consideration for taxable years under examination, within the meaning of section 3.09 of Rev. Proc. 2002–9, at the time the Form 3115, Application for Change in Accounting Method, is filed with the national office.

(2) For purposes of completing line 1a of Form 3115, the designated automatic accounting method change number for the changes in method of accounting provided in section 5.01 of this revenue procedure is No. 109.

(3) The taxpayer must compute any applicable § 481(a) adjustment in accordance with section 5.04 of this revenue procedure.

(4) The taxpayer must own the rotable spare parts as of the beginning of the year of change and must determine the adjusted depreciable basis of the rotable spare parts as of the beginning of the year of change in accordance with § 167(c), § 1011(a), and § 1.168(b)–1(a)(3) and (a)(4). The reductions required by § 1016(a)(2) for the depreciation allowable for the rotable spare parts must be determined under the method of accounting for depreciation allowable under section 4.03 of this revenue procedure for all open and closed taxable years prior to the year of change.

(5) If a taxpayer described in section 4.04(2) of this revenue procedure elects to establish general asset accounts for the rotable spare parts, the taxpayer must meet all of the following requirements beginning in the year of change:

.04 Establishment of Pools . (1) In general . Under the safe harbor method of accounting described in section 4.02 of this revenue procedure, a taxpayer must establish one or more pools for the rotable spare parts. Each pool must include only the rotable spare parts that are placed in service by the taxpayer in the same taxable year and have the same: (a) asset class under Rev. Proc. 87–56, (b) applicable depreciation method, (c) applicable recovery period, and (d) applicable convention. Additionally, rotable spare parts subject to the mid-quarter convention may only be grouped into a pool with rotable spare parts that are placed in service in the same quarter of the taxable year.

(2) General asset account election . If a taxpayer within the scope of this revenue procedure is changing the treatment of its rotable spare parts to the safe harbor method of accounting described in section 4.02 of this revenue procedure, the taxpayer also may elect to establish general asset accounts for the rotable spare parts beginning in the year of change, provided the terms and conditions in section 5.02(5) of this revenue procedure are satisfied beginning in the year of change.

.05 Dispositions . (1) In general . Under the safe harbor method of accounting described in section 4.02 of this revenue procedure, a taxpayer must use a method of accounting provided in this section 4.05 for identifying the disposed rotable spare parts. Any method other than one provided in this section 4.05 (including the “net additions” method) is not a permissible method of accounting for dispositions.

(2) Permissible methods of identifying disposed rotable spare parts . For purposes of the safe harbor method of accounting described in section 4.02 of this revenue procedure, a taxpayer must use one of the following methods of accounting to identify its disposed rotable spare parts:

(a) Specific identification of each disposed rotable spare part; or

(b) A first-in, first-out method of accounting if, in the case of rotable spare parts that are mass assets, the total rotable spare parts dispositions during a particular taxable year are readily determined from a taxpayer’s records but it is impracticable for the taxpayer to maintain records from which the taxpayer can determine the particular taxable year in which the dis

posed rotable spare parts were placed in service by the taxpayer. A taxpayer using the first-in, first-out method of accounting under this section 4.05(2)(b) must identify the rotable spare parts disposed of in a taxable year from the pool with the earliest placed-in-service year existing at the beginning of the taxable year of the disposition. For purposes of this paragraph, mass assets are a mass or group of individual items of depreciable property —

(i) that are not necessarily homogeneous;

(ii) each of which is minor in value relative to the total value of the mass or group;

(iii) numerous in quantity; (iv) usually accounted for only on a total dollar or quantity basis;

(v) with respect to which separate identification is impracticable; and,

(vi) that are placed in service by the taxpayer in the same taxable year.