[ ]

Total distribution main replacement costs not associated with identified distribution

---

Capitalized unidentified

=

( Step 2 )

Capitalization ratio (Step 4)

$60,000, K ’s distribution service line costs that are capitalized under section 5.07(2)(b)(i) of this revenue procedure because they are associated with distribution main replacements of more than four miles, (iii) $140,000, K ’s distribution service line costs that are not capitalized under section 5.07(2)(b)(ii) of this revenue procedure because they are associated with distribution main replacements of four miles or less, and (iv) $100,000, K ’s distribution service line costs that are identified under section 5.07(2)(b)(iii) of this revenue procedure as not associated with any distribution main replacements. Thus, K ’s total identified distribution service line costs equals $450,000 ($150,000

• $60,000 + $140,000 + $100,000). K subtracts the total identified distribution service line costs of $450,000 from the total distribution service line costs it incurs for the taxable year of $1 million. The net result of $550,000 ($1 million

• $450,000) is the total unidentified distribution service line costs.

(c) Step 2 . K then determines the total distribution main replacement costs not associated with identified distribution service line costs by taking the total costs incurred in Year 1 with respect to distribution main replacement property of $8 million (which includes the $1,000,000 for expenditures of less than $50,000 on blanket work orders qualifying under the de minimis rule) and decreasing these costs by (i) $2 million, the distribution main replacement costs that are per se capital expenditures under section 5.05

(4) Example . (a) Facts . K is a corporation that operates a natural gas distribution system in State D . K files its Federal income tax return on an accrual method and a calendar year basis and uses the NGSH Method. K uses work orders and blanket work orders to authorize replacement and repair work on its distribution system. K ’s work orders detail the scope of each individual project and capture direct and indirect costs for labor, construction, and materials. K ’s work orders for the replacement of distribution mains identify the distribution service lines that are replaced in conjunction with these distribution main replacements.

In Year 1, K incurs costs of $9 million with respect to replacements of linear distribution property. Of this amount, K incurs $8 million for replacements of distribution mains (including $1 million in distribution main replacement costs qualifying under the de minimis rule for blanket work orders), and K incurs $1 million for distribution service lines costs. Of the $1 million K incurs for work on distribution service lines, K incurs $150,000 for distribution service line costs that are per se capital expenditures, including distribution service line costs associated with distribution mains, the costs of which are per se capital expenditures. K incurs $60,000 for distribution service line costs that are capitalized under the NGSH Method because they are associated with distribution main replacements of more than four miles, and K incurs $140,000 for

distribution service line costs that are not required to be capitalized under the NGSH Method because they are associated with distribution main replacements of four miles or less. K also incurs $100,000 for distribution service line costs, other than per se capital expenditures, not associated with distribution main replacements. Of the $8 million K incurs for replacement of distribution mains, K incurs $2 million for per se capital expenditures related to distribution mains, $1.5 million for distribution main replacements exceeding four miles, and $3.5 million for distribution main replacements of four miles or less. K can associate $600,000 of the $1.5 million K incurs for distribution main replacements exceeding four miles with identified distribution service line costs that are capitalized under section 5.07(2)(b)(i) of this revenue procedure. K can also associate $2.5 million of the $3.5 million K incurs for distribution main replacements of four miles or less with identified distribution service line costs that are not required to be capitalized under section 5.07(2)(b)(ii) of this revenue procedure.

(b) Step 1 . To determine its total unidentified distribution service line costs, K begins with the $1 million it incurs for its work on distribution service lines for Year 1 and subtracts its identified distribution service line costs for Year 1. These identified distribution service lines costs are the sum of (i) $150,000, K ’s distribution service line costs that are per se capital expenditures under section 5.07(2)(a) of this revenue procedure, (ii)

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of this revenue procedure; (ii) $600,000, the distribution main replacements costs associated with identified distribution service line costs that are capitalized under section 5.07(2)(b)(i) of this revenue procedure; and (iii) $2.5 million, the distribution main replacements costs associated with identified distribution service line costs that are not required to be capitalized under section 5.07(2)(b)(ii) of this revenue procedure. The net result of $2.9 million ($8 million – ($2 million + $600,000 + $2.5 million)) comprises the total distribution main replacement costs not associated with identified distribution service line costs.

(d) Step 3 . Next, K determines the total costs of distribution main replacements that are capitalized under section 5.03(2) of this revenue procedure to be $1.5 million because such costs are for distribution main replacements over four miles. Then, K reduces this amount by $600,000, the distribution main replacement costs associated with identified distribution service line costs that are capitalized under section 5.07(2)(b)(i) of this revenue procedure. The difference, $900,000, represents the total capitalized costs of distribution main replacements that were not associated with identified service line costs.

(e) Step 4 . K then determines the capitalization ratio to be applied to its total unidentified distribution service line costs by dividing the total capitalized cost of distribution main replacements that are not associated with identified distribution service line costs of $900,000 by the total costs of distribution main replacements that are not associated with distribution service line costs of $2.9 million. The quotient of 0.31 ($900,000 / $2.9 million) is the capitalization ratio.

(f) Step 5 . Finally, K determines the unidentified distribution service line costs that must be capitalized by multiplying the capitalization ratio of 0.31 by the total unidentified service line costs of $550,000. The product of $170,500 (0.31 x $550,000) is the unidentified distribution service line costs that must be capitalized.

.08 General asset accounts and transi- tion rules.

(1) Requirement to use general asset accounts . A taxpayer using the NGSH Method must make a general asset account election under § 168(i)(4) and

§ 1.168(i)-1(l) to include in general asset accounts certain natural gas transmission and distribution property that is MACRS property, as defined in § 1.168(b)-1(a)(2). The following property must be included in general asset accounts:

(a) Certain property placed in ser- vice in or after year of change . Natural gas transmission and distribution property that is capitalized under the NGSH Method, that is MACRS property, and that is placed in service by the taxpayer in or after the taxable year for which the taxpayer adopts or changes to the NGSH Method. See § 1.168(i)-1(l) for time and manner of making a general asset account election for such property; and

(b) Certain property placed in ser- vice before year of change . Natural gas transmission and distribution property described in section 5.08(2)(a) of this revenue procedure. See section 5.08(2) of this revenue procedure for the application of general asset accounts to this property.

(2) Late general asset election required for certain property placed in service before year of change .

(a) In general . A taxpayer that changes to the NGSH Method must change its method of accounting to the NGSH Method on either a cut-off basis, as permitted under section 6.04 of this revenue procedure, or with a § 481(a) adjustment as described in sections 6.01, 6.02, and 6.03 of this revenue procedure. A taxpayer that changes to the NGSH Method of accounting with a cut-off or § 481(a) adjustment must also make a late general asset account election under § 168(i) (4) and § 1.168(i)-1(l) to include certain transmission and distribution property in general asset accounts. Specifically, for property for which the taxpayer did not make a general asset account election (as defined in section 5.08(2)(d) of this revenue procedure), the taxpayer must make a late general asset account election to include in general asset accounts certain MACRS property placed in service by the taxpayer in taxable years prior to the year of change and owned by the taxpayer at the beginning of the year of change, as follows:

(i) Change made in taxpayer’s first, sec- ond, or third taxable years with a § 481(a) adjustment . If a taxpayer changes to the NGSH Method for the taxpayer’s first,

second, or third taxable year ending after May 1, 2023, with a § 481(a) adjustment, the taxpayer must make a late general asset account election for linear and non-linear property, as applicable, that is described in section 5.08(2)(a) of this revenue procedure and that is capitalized under the NGSH Method as a result of this method change. See section 5.08(3)(a) of this revenue procedure for a special rule providing exceptions to certain per se capital expenditure rules applicable to a taxpayer that changes to the NGSH Method for its first taxable year ending after May 1, 2023 with a § 481(a) adjustment.

(ii) Change made in taxpayer’s first, second, or third taxable years on a cut-off basis . If a taxpayer changes to the NGSH Method for the taxpayer’s first, second, or third taxable year ending after May 1, 2023 on a cut-off basis under section 6.04 of this revenue procedure, the taxpayer must make a late general asset account election for linear and non-linear property, as applicable, that is described in section 5.08(2)(a) of this revenue procedure and that was capitalized by the taxpayer under its prior method of accounting in taxable years prior to the year of change.

(iii) Change made in fourth or subse- quent taxable years . If a taxpayer changes to the NGSH Method for the taxpayer’s fourth taxable year ending after May 1, 2023, or for any subsequent taxable year, the taxpayer must make a late general asset account election for linear and non-linear property, as applicable, that is described in section 5.08(2)(a) of this revenue procedure, that is capitalized, or that should have been capitalized under §§ 263(a) and 263A and the corresponding regulations in taxable years prior to the year of change. See section 5.08(3)(b) of this revenue procedure for special rules applying to a taxpayer that changes in its fourth or subsequent taxable year.

(iv) Year of change . For purposes of section 5.08 of this revenue procedure, “year of change” refers to the taxable year for which the taxpayer changes to the safe harbor method for linear property, the taxable year for which the taxpayer changes to both the safe harbor method for linear property and the safe harbor method for non-linear property, or the taxable year for which the taxpayer changes to the safe harbor method for non-linear property if

Bulletin No. 2023–18 819 May 1, 2023

the taxpayer had previously changed to and continues to apply the safe harbor method for linear property.

(b) Time and manner of making late general asset account election . A taxpayer that changes to the safe harbor method for linear property must make the late general asset account election for property described in section 5.08(2)(a) of this revenue procedure on its original Federal income tax return or information return, as applicable, for the first taxable year that the taxpayer changes to the safe harbor method for linear property. A taxpayer that changes to the safe harbor method for non-linear property must make the late general asset account election for property described in section 5.08(2)(b) of this revenue procedure on its original Federal income tax return or information return for the first taxable year that the taxpayer changes to the safe harbor method for non-linear property. The IRS will treat the making of a late general asset account election under this section 5.08(2) as a change in method of accounting under § 446(e). The manner of making this change in method of accounting is described in section 6.05 of this revenue procedure.

(c) Effect of late general asset account election . By making a late general asset account election described in this section 5.08(2) of this revenue procedure, the taxpayer consents to, and agrees to apply, all the provisions of § 1.168(i)-1 to the natural gas transmission and distribution property included in any general asset account. See § 1.168(i)-1. Accordingly, if the taxpayer’s present methods of accounting are not in accord with § 1.168(i)-1, the taxpayer must change to the methods of accounting permitted under § 1.168(i)-1 no later than the first taxable year that the taxpayer uses the natural gas transmission and distribution property safe harbor method of accounting.

(d) Property for which the taxpayer did not make a general asset account elec- tion . For any property described in section 5.08(2)(a) of this revenue procedure, the term “property for which the taxpayer did not make a general asset account election” refers to any property for which the taxpayer:

(i) Did not make a general asset account election for property in accordance

with § 1.168(i)-1(l), or its predecessor § 1.168(i)-1(k);

(ii) Did not make a late general asset account election under section 6.32(1) (a)(i) of Rev. Proc. 2015-14, 2015-5 I.R.B. 450, or section 6.32(1)(a)(i) of the APPENDIX to Rev. Proc. 2011-14, 2011-4 I.R.B. 330, as modified and clarified by Rev. Proc. 2014-17, 2014-12 I.R.B. 661; or

(iii) Revoked a general asset account election pursuant to section 6.11(1)(a) of Rev. Proc. 2016-29, 2016-21 I.R.B. 880, section 6.34(1)(a) of Rev. Proc. 2015-14, or section 6.34(1)(a) of the APPENDIX to Rev. Proc. 2011-14.

(3) Special rules for certain years of change.

(a) Changes made in the taxpayer’s first taxable year with a § 481(a) adjust- ment—certain per se capital expenditure rules not applied in prior years . If a taxpayer changes to the safe harbor method for linear property or for both linear property and non-linear property, as applicable, for the taxpayer’s first taxable year ending after May 1, 2023 with a § 481(a) adjustment, the per se capital expenditure rules of section 5.05(1) (g) and (h) of this revenue procedure do not apply to amounts paid or incurred to replace or repair linear property or both linear property and non-linear property, as applicable, in taxable years ending on or before May 1, 2023.

(b) Changes made in taxpayer’s fourth or subsequent taxable years .

(i) Taxpayer required to make change on a cut-off basis . A taxpayer that changes to the safe harbor method for linear property for the taxpayer’s fourth taxable year ending after May 1, 2023, or for any subsequent taxable year, must make the change on a cut-off basis, and is not eligible to use the NGSH Method rules provided in sections 5.02, 5.03, 5.05, 5.06, and 5.07 of this revenue procedure for any linear property expenditures paid or incurred prior to the year of change. A taxpayer that changes to the safe harbor method for non-linear property for the taxpayer’s fourth taxable year ending after May 1, 2023, or for any subsequent taxable year, must make this change on a cut-off basis, and is not eligible to use the NGSH Method rules provided in sections 5.04, 5.05, and 5.06 of this revenue procedure for any non-lin

ear property expenditures paid or incurred prior to the year of change.

(ii) Concurrent change . If a taxpayer changes to the safe harbor method for linear property or the safe harbor method for non-linear property for the taxpayer’s fourth taxable year ending after May 1, 2023, or for any subsequent taxable year, and did not properly capitalize under §§ 263(a) and 263A any linear property expenditures or non-linear property expenditures, as applicable, paid or incurred prior to the year of change, the taxpayer also must change its method of accounting to properly capitalize such expenditures under §§ 263(a) and 263A for the same year of change. The taxpayer must change to a method of accounting described under sections 11.08, 12.01, 12.02, 12.08, and/or 12.12 of Rev. Proc. 2022-14, 2022-7 I.R.B. 1, as applicable, and such method change must be made on the same Form 3115, Application for Change in Accounting Method, on which the taxpayer changes to the safe harbor method for linear property and the safe harbor method for non-linear property, as applicable.

(4) Examples . The following examples illustrate the application of this section 5.08. In each example, it is assumed that the taxpayer (i) is a C corporation that files its Federal income tax returns on an accrual method and a calendar taxable year basis, (ii) is within the scope of this revenue procedure, (iii) placed in service natural gas transmission property or distribution property that is described in section 4 of this revenue procedure and is MACRS property, (iv) did not make a general asset account election for any natural gas transmission property or distribution property placed in service by the taxpayer in any taxable year before the first taxable year that the taxpayer uses the NGSH Method, (v) is changing its methods of accounting for both linear and non-linear property under the NGSH Method for the same taxable year, and (vi) is not changing to the NGSH Method on a cut-off basis under section 6.04 of this revenue procedure. It is also assumed, unless otherwise stated, that the costs of linear and non-linear property replacements before Year 1 were not capitalized under § 263(a), that these costs would not have been required to be capitalized under sections 5.02, 5.03,

May 1, 2023 820 Bulletin No. 2023–18

5.04, 5.06, and 5.07 of this revenue procedure, and that these costs would not have been treated as per se capital expenditures under sections 5.05(1)(a)-(f), (i), or (j) of this revenue procedure. Further, it is assumed that § 1.168(i)-1(e)(3) (special rules for certain dispositions of assets in general asset accounts) does not apply for the first taxable year that the taxpayer uses the NGSH Method and for any subsequent taxable year. Moreover, for purposes of these examples, “Year 1” refers to the taxpayer’s first taxable year ending after May 1, 2023, “Year 2” refers to the taxpayer’s second taxable year ending after May 1, 2023, and “Year 4” refers to the taxpayer’s fourth taxable year ending after May 1, 2023. The following examples do not address the treatment of depreciation or the requirement or computation of the § 481(a) adjustment, if applicable, for purposes of changing the taxpayer’s methods of accounting under section 6 of this revenue procedure.

(a) Example 1 . (i) J is a natural gas transmission company. Before Year 1, J owned and placed in service natural gas transmission property at a cost of $100 million before any dispositions or additions. Before Year 1, J replaced parts of such property that had an original cost of $10 million and incurred $12 million for the cost of such replacements. On its Federal income tax returns before Year 1, J recognized losses upon the dispositions of that $10 million of property and deducted $12 million for the cost of the replacements under § 162(a). J files a Form 3115 with its Federal income tax return for Year 1 to change its methods of accounting for linear and non-linear property to use the NGSH Method.

(ii) Pursuant to the special rule in section 5.08(3) (a) of this revenue procedure, the per se capital expenditure rules in section 5.05(1)(g) and (h) of this revenue procedure do not apply to the replacement cost of $12 million that J deducted under § 162(a) before J ’s Year 1. Accordingly, this $12 million cost of the replacements is not a per se capital expenditure under the NGSH Method.

(iii) At the beginning of Year 1, J owns natural gas transmission property at a cost of $90 million ($100 million - $10 million). Because Year 1 is J ’s first taxable year ending after May 1, 2023, J must make a late general asset account election on its Form 3115 to include in general asset accounts all of the $90 million of natural gas transmission property that J owns at the beginning of Year 1.

(b) Example 2 . (i) The facts are the same as the facts in Example 1, except that, during Year 1, J replaced a part of the natural gas transmission property that had an original cost of $2 million and incurred $3.5 million for the cost of such replacements.

(ii) As a result of the late general asset account election in Example 1, the $2 million of the natural gas transmission property that J replaced during Year 1 is in a general asset account. Pursuant to

§ 1.168(i)-1(e)(2), J does not recognize a loss upon the disposition of that $2 million of property and continues to depreciate that property on its Federal income tax return for Year 1 and subsequent taxable years.

(iii) Because J did not recognize a loss upon the disposition of that $2 million of property, the cost of $3.5 million for replacing a part of the natural gas transmission property during Year 1 is not a per se capital expenditure under section 5.05(1)(g) or (h) of this revenue procedure. Accordingly, for its Federal income tax return for Year 1, J must apply the NGSH Method to all amounts incurred in Year 1 that are subject to the NGSH Method, including the $ 3.5 million in replacement costs. Also, J must make general asset account elections to include in general asset accounts all costs capitalized under the NGSH Method in Year 1.

(c) Example 3 . (i) I is a local natural gas distribution company. Before Year 1, I owned and placed in service gas distribution property at a cost of $120 million before any dispositions or additions. Before Year 1, I replaced parts of such property that had an original cost of $10 million and incurred $12 million for the cost of such replacements. On its Federal income tax returns before Year 1, I recognized losses upon the dispositions of that $10 million of property and deducted $12 million for the cost of the replacements under § 162(a). During Year 1, I replaced a part of the natural gas distribution property that had an original cost of $2 million and incurred $3 million for the cost of such replacements. On its Federal income tax return for Year 1, I recognized a loss upon the disposition of the $2 million of replaced property, and deducted $3 million for the cost of the replacements under § 162(a). I files a Form 3115 with its Federal income tax return for Year 2 to change its methods of accounting for its linear and non-linear property to use the NGSH Method.

(ii) Because I filed its method change in Year 2, the special rule for certain per se capital expenditures under section 5.08(3)(a) of this revenue procedure does not apply to taxable years ending before the taxpayer’s first taxable year for which the taxpayer changes. Accordingly, the per se capital expenditure rules in section 5.05(1)(g) and (h) of this revenue procedure apply to the replacement cost of $12 million that I deducted under § 162(a) on its Federal income tax returns before Year 1, and to the replacement cost of $3 million that I deducted under § 162(a) on its Federal income tax return for Year 1. Therefore, the total cost of $15 million for these replacements is a per se capital expenditure, and must be capitalized, under the NGSH Method.

(iii) At the beginning of Year 2, I owns natural gas distribution property at a cost of $123 million ($120 million - $10 million + $12 million - $2 million + $3 million). Because Year 2 is I ’s second taxable year ending after May 1, 2023, under section 5.08(2)(a)(i) of this revenue procedure, I must make a late general asset account election on its Form 3115 to include in general asset accounts all of the $123 million of natural gas distribution property that I owns at the beginning of Year 2. In addition, for its Federal income tax return for Year 2, I must apply the NGSH Method to all amounts paid or incurred in Year 2 that are subject to the NGSH Method, and I must make general asset account elections to include

in general asset accounts all costs capitalized under the NGSH Method in Year 2.

(d) Example 4 . (i) H is a local natural gas distribution company. Before Year 4, H owned and placed in service natural gas distribution property at a cost of $150 million before any dispositions or additions. Before Year 4, H replaced parts of such property that had an original cost of $30 million and incurred $45 million for the cost of such replacements. On its Federal income tax returns before Year 4, H recognized losses upon the dispositions of that $30 million of property and capitalized $45 million for the cost of the replacements under § 263(a). H files a Form 3115 with its Federal income tax return for Year 4 to change its methods of accounting for its linear and non-linear property to use the NGSH Method.

(ii) At the beginning of Year 4, H owns natural gas distribution property at a cost of $165 million ($150 million - $30 million + $45 million). Because Year 4 is H ’s fourth taxable year ending after May 1, 2023, under section 5.08(2)(a)(iii) of this revenue procedure, H must make a late general asset account election on its Form 3115 to include in general asset accounts all of the $165 million of natural gas distribution property that H owns at the beginning of Year 4. Pursuant to section 5.08(3)(b)(i) of this revenue procedure, H is not eligible to use any of the NGSH Method rules provided in sections 5.02, 5.03, 5.04, 5.05, 5.06, and 5.07 of this revenue procedure for any natural gas transmission and distribution property expenditures paid or incurred prior to Year 4. However, for its Federal income tax return for Year 4, H must apply the NGSH Method to all amounts paid or incurred in Year 4 that are subject to the NGSH Method, and H must make general asset account elections to include in general asset accounts all costs capitalized under the NGSH Method in Year 4.

.09 Class life asset depreciation range system (CLADR) percentage repair allow- ance exclusion. A taxpayer that changes its treatment of natural gas transmission and distribution property expenditures to use the NGSH Method may not elect the class life asset depreciation range system repair allowance under § 1.167(a)-11(d)(2) in any taxable year that the taxpayer uses the NGSH Method. In addition, for any taxable year in which the § 1.167(a)-11(d) (2) repair allowance election was made, the NGSH Method 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).

.10 Applicability of § 263A . Amounts paid or incurred to which the taxpayer applies the NGSH Method are not capitalized separately under § 263A(a)(1) (B) and (b)(1) as direct or indirect costs of producing gas transmission and distribution property. However, a taxpayer that produces natural gas or acquires natural gas for resale in its trade or business

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must capitalize under § 263A direct and allocable indirect costs of producing or acquiring such property or any other property subject to § 263A. See §§ 1.263A-2 and 1.263A-3.

.11 Statistical sampling. In applying the NGSH Method, statistical sampling may be used by following the guidance provided in Rev. Proc. 2011-42, 2011-37 I.R.B. 318.