SECTION 7. PAPERWORK — Internal Revenue Bulletin 2011-37

REDUCTION ACT

The collection of information contained in this revenue procedure has been reviewed and approved by the Office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545–0123. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

The collection of information in this revenue procedure is in Appendix B. This information is required to ensure compliance with the statistical sampling methodology contained in this revenue procedure. The information will be used to evaluate compliance with the procedures described in this revenue procedure. The collection of information is mandatory. The likely recordkeepers are businesses or other forprofit institutions.

The estimated total annual recordkeeping burden is 2400 hours. The estimated

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APPENDIX A

Sampling Plan Standards

Taxpayers are required to have a written sampling plan prior to the execution of a sample. The plan must include the following items:

(1) The objective of the plan including a description of what value is being estimated and for which tax year(s) the estimate is applicable;

(2) Population definition and reconciliation of the population to the tax return;

(3) Definition of the sampling frame;

(4) Definition of the sampling unit;

(5) Source of the random numbers, the starting point or seed, and the method used in selecting them;

(6) Sample size, along with supporting factors in the determination;

(7) Method used to associate random numbers to the frame;

(8) Steps to be taken to insure that the serialization of the frame is carried out independent of the drawing of random numbers;

(9) Steps to be taken in evaluating the sampling unit; and

(10) The appraisal method(s) to be used in appraising the sample.

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APPENDIX B

Sampling Documentation Standards

Sample Execution Documentation

Taxpayers must retain adequate documentation to support the statistical application, sample unit findings, and all aspects of the sample plan and execution. The execution of the sample must be documented and include information for each of the following:

(1) The seed or starting point of the random numbers;

(2) The pairing of random numbers to the frame along with supporting information to retrace the process;

(3) List of the sampling units selected and the results of the evaluation of each unit;

(4) Supporting documentation such as notes, invoices, purchase orders, project descriptions, etc., which support the conclusion reached about each sample item;

(5) The calculation of the projected estimate(s) to the population, including the computation of the standard error of the estimate(s);

(6) A statement as to any slips or blemishes in the execution of the sampling procedure and any pertinent decision rules; and

(7) Computation of all associated adjustments. (An example of an associated adjustment would be the amount of depreciation allowable based on a probability determination of an amount capitalized).

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APPENDIX C

Technical Formulas

UNSTRATIFIED (SIMPLE RANDOM SAMPLE)

MEAN ESTIMATOR

Sample Mean of Audited Amounts

Estimate of Total Audited Amount

STRATIFIED MEAN ESTIMATOR

Estimated Standard Deviation of the Audited Amount

Estimated Standard Error of the Total Audited Amount

Achieved Precision of the Total Audited Amount

UNSTRATIFIED (SIMPLE RANDOM SAMPLE)

DIFFERENCE ESTIMATOR

Estimate of Total Difference

Estimate of Total Audited Amount

STRATIFIED DIFFERENCE ESTIMATOR

Estimated Standard Deviation of the Difference Amount

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UNSTRATIFIED (SIMPLE RANDOM SAMPLE)

DIFFERENCE ESTIMATOR

STRATIFIED DIFFERENCE ESTIMATOR

Estimated Standard Error of the Difference Amount

Achieved Precision of the Difference Amount

UNSTRATIFIED (SIMPLE RANDOM SAMPLE)

RATIO ESTIMATOR

STRATIFIED COMBINED RATIO ESTIMATOR

Estimated Ratio of Audited Amount to Recorded Amount

Estimate of Total Audited Amount

Estimated Standard Deviation of the Ratio

Estimated Standard Deviation of the Ratio in i ^th Stratum

Estimated Standard Error of the Ratio Amounts

Achieved Precision of the Ratio Amounts

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UNSTRATIFIED (SIMPLE RANDOM SAMPLE)

REGRESSION ESTIMATOR

STRATIFIED COMBINED REGRESSION ESTIMATOR

Estimated Regression Coefficient

Estimate of Total Audited Amount

Estimated Standard Deviation of the Regression Amounts

Estimated Covariance between the Audited and Recorded Amounts in i ^th Stratum

Estimated Standard Deviation between the Audited and Recorded Amounts in i ^th Stratum

Estimated Standard Error of the Audited and Recorded Amounts

Achieved Precision of the Audited and Recorded Amounts

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Definition of Symbols

TERM	DEFINITION
n	Sample Size
N	Population Size
x	The value of the sampling unit that is being used as the primary variable of interest. In audit sampling, this would be the audited (or revised) value of the transaction.
y	The value of the sampling unit that is being used as the “paired” variable that is related to the variable of interest. In audit sampling, this would be the reported (or original) value of the transaction.
d	The value of the sampling unit that is the difference between “paired” variable (y) and the variable of interest (x). That is, d = x - y. In audit sampling, this would be the difference (or the change) of each transaction’s value.
X	The total value of the primary variable of interest. In audit sampling, this would be the estimated total audited value of the population. Typically, this value is not known for the entire population and is estimated based on the statistical sample selected.
Y	The total value of the variable that is paired with variable of interest. In audit sampling, this would be the total reported value of the population. Typically, this value is known for the entire population and may be estimated based on the statistical sample selected.
D	The total value of the difference between the “paired” variable and the variable of interest. In audit sampling, this would be the estimated total difference of the population. Typically, this value is not known for the entire population and is estimated based on the statistical sample selected.
UR	The confidence coefficient which is based on either the Student’s t-distribution or the normal distribution. For example, a 95% one-sided confidence coefficient based on the normal distribution is 1.645. This term is often referred to as the t-value and the z-value.

the amount of expenditures required to be capitalized under § 263(a). This revenue procedure classifies transmission and distribution property as either linear property (for example, conductor, poles) or non-linear property (for example, transformers, customer electric meters). For linear property, this revenue procedure defines the appropriate units of property and provides a simplified method of determining when the cost of replacing a portion of a unit of linear property must be capitalized. For non-linear property, this revenue procedure defines the appropriate units of property but does not provide a simplified method of determining when the cost of replacing a portion of a unit of non-linear property must be capitalized. Taxpayers must follow the principles of § 263(a) to determine whether the replacement of a portion of a non-linear unit of property is deductible or capitalizable. This revenue procedure also identifies certain expenditures that are per se treated as capital expenditures.

.03 A taxpayer’s method for determining whether an expenditure is deductible

26 CFR 1.263(a)–1: Capital expenditures; in gen- eral. (Also: §§ 162 and 446.)

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