SECTION 6. EXAMPLES

The following examples illustrate the application of this revenue procedure. In each example, it is assumed that X, the taxpayer, files its federal income tax return on a calendar year basis and uses the transmission and distribution property safe harbor method of accounting provided by this revenue procedure.

Example 1 . On July 20 of Year 1, X received authorization from its regulatory commission to replace a number of defective poles in Circuit A, which consists of 2,000 poles in total. On July 21 of Year 1, X approves the replacement of and replaces three of the defective poles. On July 22 of Year 1, X approves the replacement of and replaces two additional defective poles. Although final approval of the July 21 and July 22 replacements occurred on different days, the replacements are aggregated because the replacement of all five poles was required by a single event, the July 20 authorization. X ’s cost of replacing the five poles is currently deductible because the replacement of five poles represents 0.25 percent of the poles in Circuit A, which is 10 percent or less of the poles in the circuit.

Example 2 . In addition to the facts provided in Example 1, in response to a regulatory commission decision rendered in a prior year to replace utility poles with fungus damage, between November 1 of Year 1 and January 21 of Year 2, X replaces 500 poles in Circuit A . X authorized the replacement of the 500 poles through the issuance of two work orders: one that authorized the replacements made in Year 1

and another that authorized the replacements made in Year 2. The replacements are aggregated, however, because the replacement of all 500 poles was required by the regulatory commission decision. X ’s costs of replacing the 500 poles are capital expenditures because the replacement of 500 poles represents 25 percent of the poles in Circuit A, which is more than 10 percent of the poles in the circuit.

Example 3 . In addition to the facts provided in Examples 1 and 2, during a routine inspection of Circuit A, X determined that 50 poles were unstable. X replaces the 50 unstable poles on December 15 of Year 1. The pole replacement project was authorized by managers on the day the work crews were assigned and the poles were replaced. X ’s costs of replacing the 50 poles are currently deductible because the replacement of 50 poles represents 2.5 percent of the poles in the circuit, which is 10 percent or less of the poles in the circuit.

Example 4 . In addition to the facts provided in Examples 1–3, Circuit A contains five miles (26,400 feet) of overhead conductor. During Year 1, X initiates two separate projects: one to replace 2,000 feet of overhead conductor with new overhead conductor and one to replace 150 feet of overhead conductor with underground conductor. X ’s costs of replacing the 2,000 feet of overhead conductor are currently deductible because the replacement of 2,000 feet of conductor represents 7.6 percent of the conductor in Circuit A, which is 10 percent or less of the conductor in Circuit A . X ’s costs of replacing 150 feet of overhead conductor with underground conductor are capital expenditures because, even though X replaced less than 0.6 percent of the conductor in Circuit A, the costs of replacing overhead conductor with underground conductor must be capitalized. If these two replacement projects occurred as part of one single project, the length of replacement conductor required to be capitalized under section 5.06 of this revenue procedure would be excluded from both the numerator and the denominator of the ratio used to determine the percentage of conductor replaced in Circuit A .

Example 5 . X uses a blanket work order system under which certain replacements or additions are charged to blanket work orders. X follows its policy limiting per event charges to blanket work orders to replacements of linear property costing $50,000 or less. The cost of linear property replacements charged on these blanket work orders are accumulated over the full tax year and then are charged to X ’s accounts. In Year 1, X charges $800,000 of linear property replacements to blanket work orders. Because X adheres to a policy that limits the per event charges to blanket work orders to replacements of linear property costing $50,000 or less, X may deduct the $800,000 of linear property replacements charged to the blanket work orders in Year 1.

Example 6 . X owns Circuit B, which serves at the outer edge of a growing residential community. A plat exists for housing development P, on which construction has not begun. Circuit B contains 2,000 poles. On March 1 of Year 1, X receives authorization to extend Circuit B to serve housing development P . X extends Circuit B between May and September of Year 1, placing 180 poles into service as part of Circuit B . X ’s costs of placing 180 poles into service as part of Circuit B are capital expenditures because, even though X increased the number of poles in Cir

2011–37 I.R.B. 329 September 12, 2011

(providing the general rules) and section 6.02(7)(b) (providing the mailing address) of this revenue procedure.

(5) Designated automatic accounting method change numbers . The designated automatic accounting method change number for a change to the method of accounting provided in Rev. Proc. 2011–43 is “160.”

(6) Contact information . For further information regarding a change under this section, contact Alan S. Williams at (202) 622–4950 (not a toll-free call).