SECTION 2. BACKGROUND

.01 Taxpayers that provide wireless telecommunication services incur significant expenditures to maintain, replace, and improve wireless 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 wireless network assets can be particularly difficult, largely because the property consists of a network of interconnected items such as mobile telephone switching offices and property located at cell sites. Taxpayers and the Internal Revenue Service often do not agree on which items within this 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 wireless network assets, this revenue procedure provides two alternative safe harbor approaches. Section 5 provides a wireless “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 by the Code or 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

May 2, 2011 743 2011–18 I.R.B.

L. 111–5, 123 Stat. 115 (section 1603 payments)).

(4) Using the adjusted basis determined in step (3), determine the amount attributable to 5-year, 7-year, and 15-year property and nonresidential real property, and multiply each of these amounts by 5%. The result is the network asset maintenance allowance for each class of property.

(5) The sum of the network asset maintenance allowances determined in (4) for each class of property is the taxpayer’s network asset maintenance allowance amount for the taxable year.

.03 § 263(a) capital expenditures . The wireless network asset capital expenditures for § 263(a) for the taxable year under the network asset maintenance allowance method are determined as follows:

(1) Start with the adjusted basis for 5-year, 7-year, and 15-year property and nonresidential real property determined in section 5.02(4) above.

(2) For each class of property, multiply the adjusted basis attributable to the class of property by 95%. The result is each class of property’s basis amount after taking into account the network asset maintenance allowance.

(3) For each class of property, allocate that class of property’s basis amount determined in 5.03(2) among the class of property’s wireless network assets (excluding wireless network assets acquired in an applicable asset acquisition as defined in § 1060 or in a transaction to which § 338(h)(10) applies) according to the basis of each wireless network asset determined before application of the network asset maintenance allowance.

(4) The amount determined in (3) for each network asset (excluding wireless network assets acquired in an applicable asset acquisition as defined in § 1060 or in a transaction to which § 338(h)(10) applies) is the basis of such asset to be used to determine the deductions allowable or income tax credits available that require tax basis to be reduced before any depreciation is computed (for example, § 179, § 179D, or similar provisions; § 44 and § 46; and section 1603 payments). The net amount for each network asset after the reduction in basis for such deductions, credits, and section 1603 payments is that property’s § 1.168(b)–1(a)(3) unadjusted depreciable basis.

the computer-based switching equipment, base station controllers (or generational equivalent), radio network controllers, mobility managers, operations and management platforms, protocol handlers, vocoders, modems, cross-connects, optical-cross connect bays, and associated cables), dedicated heating, ventilation, and air conditioning (HVAC) equipment and dedicated power (including battery backup system) for the computer-based switching equipment and related equipment at the MTSO.

.04 Cell site transmission equipment . “Cell site transmission equipment” includes the antenna systems (including the antenna itself, antenna cables, microwave equipment, RET equipment, and the RET central control unit (CCU) controller) but does not include base transceiver station radio cabinets or cell site support and other equipment.

.05 Cell site radio equipment . “Cell site radio equipment” includes the base station controller (or generational equivalent), base transceiver station (or generational equivalent), their own weather proof enclosure or cabinet (including any equipment integrated into or built into the base station controller or base transceiver station; for example, integrated or built-in equipment might include HVAC and power equipment, alarms, enhanced 911 service equipment, or the RET CCU controller), and associated cables.

.06 Cell site support equipment . “Cell site support equipment” includes the alarms or enhanced 911 service equipment not integrated into or built into a base station controller or base transceiver station, and associated cables. This unit of property does not include general incoming power panels, general receptacles, general lighting, common cell site enclosure grounding systems, or equipment integrated into or considered part of the cell site enclosure.