SECTION 2. BACKGROUND

.01 Taxpayers that provide wireline telecommunication services incur significant expenditures to maintain, replace, and improve wireline network property. Whether these expenditures are deductible as repairs under § 162 or must be capitalized as improvements under § 263(a)

depends on whether the expenditures materially increase the value of the property or substantially prolong its useful life. See § 1.162–4 of the Income Tax Regulations. Applying capitalization principles to wireline network assets can be particularly difficult, largely because the property consists of a network of interconnected items, such as central office equipment, poles, copper wire, fiber optic cable, and remote and network terminals. Taxpayers and the Internal Revenue Service often do not agree on which items within a network constitute discrete units of property and whether the replacement of a particular item materially increases the value or substantially prolongs the useful life of a unit of property.

.02 To minimize disputes regarding the deductibility or capitalization of expenditures to maintain, replace, or improve wireline network assets, this revenue procedure provides two alternative safe harbor approaches. Section 5 provides a wireline “network asset maintenance allowance method” for determining the amount of expenditures required to be capitalized under § 263(a). Section 6 defines units of property that may be adopted and to which existing principles under § 263(a) are applied.

.03 A taxpayer’s method for determining whether an expenditure is deductible or is capitalizable is a method of accounting under § 446. Except as otherwise expressly provided in the Code and the regulations thereunder, § 446(e) and § 1.446–1(e)(2) require a taxpayer to secure the consent of the Commissioner of Internal Revenue before changing a method of accounting for federal income tax purposes. Section 1.446–1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions necessary to permit a taxpayer to obtain consent to change a method of accounting. Section 7 of this revenue procedure provides the procedures by which a taxpayer may obtain automatic consent for a change in method of accounting to adopt either of the alternative safe harbor approaches provided by this revenue procedure.