SECTION 2. BACKGROUND

.01 Taxpayers that transmit and distribute electricity incur significant expenditures to maintain, replace, and improve transmission and distribution 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 electric transmission and distribution property can be particularly difficult, largely because the property consists of a network of interconnected items such as poles, conductor, and transformers. 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 transmission and distribution property, this revenue procedure provides a “transmission and distribution property safe harbor method of accounting” for determining

September 12, 2011 326 2011–37 I.R.B.

taxpayer’s customer (excluding customer electric meters).

.09 Circuit . “Circuit” means the linear property: (1) between a generating station and the initial substation; (2) between any two substations; or (3) between the final substation (the last substation before the line transformer) and the customer’s electric meter.

.10 Blanket work order procedure . “Blanket work order procedure” means a procedure under which a taxpayer charges multiple replacements over a specific period of time to a single work order.