SECTION 4. DEFINITIONS — Internal Revenue Bulletin 2011-37

The following definitions apply solely for purposes of this revenue procedure:

.01 Linear property . “Linear property” means all electric transmission and distribution property except non-linear property.

.02 Non-linear property . “Non-linear property” means all electric transmission and distribution property that is substation property, storage battery property, line transformers, customer electric meters (including smart electric meters), or property installed on a customer’s premises.

.03 Electric transmission and distribu- tion property . “Electric transmission and distribution property” means real and personal property that is used to conduct and control electricity at any point between an electric generating station and the location of consumption of the electricity by the customer. The electric generating station is not included in this definition. Examples include wires (conductor), tow

ers, poles, structures and fittings mounted on towers and poles, electrical interrupters (such as circuit breakers, fuses, and other switches), transformers, capacitors, instrumentation, security structures, and pads on which equipment is mounted. In addition and solely for the purposes of this revenue procedure, electric transmission and distribution property includes (a) street lighting and (b) traffic and similar signal systems. Electric transmission and distribution property does not include personal or real property, such as a corporate office building, not directly used to conduct and control electricity.

.04 Substation property . “Substation property” means transformers and devices (such as fuses, breakers, other switches, insulators, fencing, walls, and enclosures or other structures) that are installed at an electrical substation, i.e., a subsidiary station of an electricity generation, transmission, and distribution system where voltage is transformed from high to low, or the reverse, using transformers.

.05 Storage battery property . “Storage battery property” means one or more interconnected batteries and the devices that connect the batteries to other transmission and distribution property.

.06 Line transformer . “Line transformer” means the electrical device that causes an interim or final reduction of the voltage of electricity to the voltage at which the electricity is delivered to one or more customers. Line transformers are typically located on a pole when overhead service is provided or in a box or vault when underground service is provided. A transformer located at a substation is not a line transformer.

.07 Customer electric meter . “Customer electric meter” means the device that measures the amount of electricity delivered to a customer. In addition to traditional electric meters, this term includes smart electric meters, advanced electric meters that enable two-way communication between the electric meter and the central system for monitoring and billing purposes.

.08 Property installed on a customer’s premises . “Property installed on a customer’s premises” means the devices, such as electrical usage controls on appliances, which are owned by the taxpayer but installed on property owned by the

2011–37 I.R.B. 327 September 12, 2011

(2) Per se capital expenditures ex- cluded . For purposes of determining whether more than 10 percent of a unit of linear property is replaced, replacements that are required to be capitalized under section 5.06 of this revenue procedure are excluded ( i.e., per se capital expenditures are not included in either the numerator or the denominator of the ratio used to determine the percentage of a unit of property replaced).

(3) Transition rule . For the first three taxable years ending on or after December 31, 2010, a taxpayer using the transmission and distribution property safe harbor method provided by this revenue procedure may determine the percentage of a unit of linear property replaced on the basis of an average circuit within a county.

.04 Aggregation requirement . (1) Aggregation rule. For purposes of determining whether more than 10 percent of the unit of linear property is replaced, a taxpayer must aggregate multiple replacements within a circuit if—

(a) the replacements are initiated at the same time;

(b) the replacements are required by the occurrence of a single event; or

(c) a regulatory commission decision authorizes the replacements as part of an identified program aimed at a specific purpose.

(2) Initiated at the same time . Specific multiple replacements are initiated at the same time by any action that provides the final approval for the physical conduct of the replacements. In general, such final approval includes the issuance of a work order under the taxpayer’s operating procedures that authorizes workers to perform the replacements. However, work orders that authorize a replacement before the need for the replacement is identified by the taxpayer, such as a blanket work order, do not constitute final approval for the physical conduct of the replacement.

.05 Special rules for blanket work or- ders .

(1) Allocation of costs among circuits . A taxpayer that uses a blanket work order procedure may use the following simplifying assumptions for purposes of determining whether more than 10 percent of the unit of linear property in a circuit is replaced:

(a) A taxpayer that replaces property in multiple circuits and charges the replace

property) constitute a single unit of linear property.

(b) All towers and poles and all structures and fittings mounted on towers and poles (“fully-dressed poles”) (not including the line transformers) constitute a single unit of linear property.

(d) All boxes and vaults, and structures and fittings mounted in boxes or vaults (not including the line transformers) constitute a single unit of linear property.

(e) All the customer service drops (the conductor and any associated devices running from a utility pole or underground box or vault to a customer’s building or other premises) constitute a single unit of linear property.

(f) All the street lighting constitutes a single unit of linear property.

(g) All the traffic and similar signal systems constitute a single unit of linear property.

(h) All the smart grid property (as defined in § 168(i)(19)(B)) not located at a substation (including access points, relays, and e-bridges, but excluding smart electric meters) constitutes a single unit of linear property.

(2) Units of non-linear property . For purposes of this revenue procedure, the following are the units of property for nonlinear property:

(a) Each transformer at a substation constitutes a single unit of non-linear property.

(b) All fencing, walls, enclosures, other structures surrounding each substation or supporting the substation electrical devices (excluding enclosures or buildings suitable for occupation), and land improvements that are not properly capitalized to land constitute a single unit of non-linear property.

(d) All smart grid property, as defined in § 168(i)(19)(B), located at each substation constitutes a single unit of non-linear property.

(e) All other electrical devices at each substation, such as fuses, breakers, other switches, regulators, insulators, meters, and the pad on which the equipment is installed constitute a single unit of non-linear property.

(f) Each line transformer constitutes a single unit of non-linear property.

(g) Each customer electric meter (including each smart electric meter) constitutes a single unit of non-linear property.

(h) All other property installed on each customer’s premises ( i.e., all installations on a single premises) constitutes a single unit of non-linear property.

.03 Determining the percentage of a unit of linear property replaced .

(1) In general . The percentage of a unit of linear property replaced is determined based on the number of items (or other denominating factor) existing in a unit of property at the beginning of a taxable year as follows:

(a) For conductor and associated devices used to conduct electricity (not including customer service lines), the number of feet of conductor replaced is divided by the number of feet of conductor in the unit of property (for example, if 100 feet of conductor is replaced in a circuit that contains 2,000 feet of conductor, the percentage of the conductor replaced is 5 percent

[100 / 2,000 = .05]).

(b) For poles and towers, the number of poles and towers replaced is divided by the number of poles and towers in the unit of property.

(c) For underground conduit, the number of feet of conduit replaced is divided by the number of feet of conduit in the unit of property.

(d) For boxes and vaults, the number of boxes and vaults replaced is divided by the number of boxes and vaults in the unit of property.

(e) For customer service drops, the number of customer service drops replaced is divided by the number of customer service drops in the unit of property.

(f) For street lighting, the number of street lights replaced is divided by the number of street lights in the unit of property.

(g) For traffic and similar signal systems, the number of traffic and similar signals replaced is divided by the number of traffic and similar signals in the unit of property.

(h) For smart grid property as defined in §168(i)(19)(B), but excluding smart electric meters as defined in § 168(i)(18)(B), the historical cost of smart grid devices replaced is divided by the historical cost of the smart grid unit of property.

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ments to a single blanket work order may allocate the replacements among the multiple circuits either (1) on a pro-rata basis (equally among the circuits) or (2) proportionately based on the length of each circuit.

(b) A taxpayer whose blanket work order procedure uses a standard cost accounting system may determine the number of replacements charged to a blanket work order by dividing the total cost of replacements charged to the blanket work order by the applicable standard cost.

(c) A taxpayer whose blanket work order system accumulates the dollars expended under the blanket work order, but not the quantity of replacements, may determine the percentage of a unit of linear property replaced by dividing the total dollar amount charged to the blanket work order for replacements to the linear unit of property over a fixed period of time by the total replacement cost of the whole unit of linear property. The fixed period of time used for the calculation cannot exceed one year.

(2) Blanket work order de minimis rule . A taxpayer that adheres to a policy that limits per-event charges under a blanket work order procedure to replacements of property costing $50,000 or less is not required to capitalize the costs of linear property replacements charged to the blanket work order.

.06 Per se capital expenditures . The following expenditures must be capitalized, notwithstanding any other provision of this revenue procedure:

(1) The costs of replacing overhead conductor with underground conductor within a circuit, regardless of the percentage of conductor in the circuit that is replaced.

(2) The costs of property necessary to add one or more new customers.

(3) The costs of property that materially increases rated capacity (i) in a unit of property or (ii) to one or more customers.

(4) The costs of property that extends an existing circuit.

.07 CLADR percentage repair al- lowance exclusion. An eligible taxpayer that changes its treatment of transmission and distribution property expenditures to adopt the safe harbor method described in this revenue procedure may not elect the Class Life Asset Depreciation Range System (ADR) repair allowance under

§ 1.167(a)–11(d)(2) in any taxable year that the taxpayer uses the safe harbor method permitted under this revenue procedure. In addition, for any taxable year in which the § 1.167(a)–11(d)(2) repair allowance election was made, the safe harbor method described in section 5.01 of this revenue procedure may not be applied to change the taxpayer’s treatment of property to which the taxpayer elected to apply the repair allowance under § 1.167(a)–11(d)(2).

.08 Statistical sampling . By following the sampling procedures provided in Rev. Proc. 2011–42, taxpayers adopting the safe harbor method of accounting provided in this revenue procedure may use statistical sampling to determine whether costs to maintain, replace, and improve transmission and distribution property are deductible as repairs under § 162 or must be capitalized as improvements under § 263(a). Sampling methodologies not described in Rev. Proc. 2011–42 are not permitted under the transmission and distribution property safe harbor method of accounting.