Bulletin No. 2023–18

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2023–18

May 1, 2023

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

ADMINISTRATIVE

Announcement 2023-13, page 833.

The Office of Professional Responsibility (OPR) announces

recent disciplinary sanctions involving attorneys, certified

public accountants, enrolled agents, enrolled actuaries,

enrolled retirement plan agents, and appraisers. These individuals are subject to the regulations governing practice

before the Internal Revenue Service (IRS), which are set out in

Title 31, Code of Federal Regulations, Part 10, and which are

published in pamphlet form as Treasury Department Circular

No. 230. The regulations prescribe the duties and restrictions relating to such practice and prescribe the disciplinary

sanctions for violating the regulations.

Rev. Proc. 2023-15, page 806.

This revenue procedure provides a safe harbor method of

accounting that taxpayers may use to determine whether

expenses to repair, maintain, replace, or improve natural

gas transmission and distribution property must be capitalized. To apply this safe harbor method, a taxpayer must first

classify its natural gas transmission and distribution property as either linear property (for example, pipe, fittings,

and valves) or non-linear property (for example, compressors, regulators, and meters). This revenue procedure then

provides methods of accounting for each type of property,

specifically, a safe harbor method used for the taxpayer’s

linear transmission and distribution property and an optional

safe harbor method that the taxpayer may choose to use

Finding Lists begin on page ii.

for its non-linear transmission and distribution property. The

revenue procedure also provides procedures for obtaining

automatic consent to change to the safe harbor method for

linear property and the safe harbor method for non-linear

property.

EMPLOYEE PLANS

Notice 2023-33, page 803.

This notice sets forth updates on the corporate bond monthly

yield curve, the corresponding spot segment rates for April

2023 used under § 417(e)(3)(D), the 24-month average

segment rates applicable for April 2023, and the 30-year

Treasury rates, as reflected by the application of § 430(h)

(2)(C)(iv).

INCOME TAX

Rev. Rul. 2023-8, page 801.

This revenue ruling obsoletes Revenue Ruling 58-74, 1958-1

C.B. 148, relating to the deductibility of research or experimental expenditures for prior taxable years to which the

expense method is applicable, because there are insufficient

facts in Revenue Ruling 58-74 to properly analyze whether

the taxpayer’s failure to deduct certain research or experimental expenditures, when it deducted other research or

experimental expenditures, constituted a method of accounting or an error.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and

enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all

substantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede,

revoke, modify, or amend any of those previously published

in the Bulletin. All published rulings apply retroactively unless

otherwise indicated. Procedures relating solely to matters

of internal management are not published; however, statements of internal practices and procedures that affect the

rights and duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service

on the application of the law to the pivotal facts stated in

the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

deleted to prevent unwarranted invasions of privacy and to

comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative

Rulings. Bank Secrecy Act Administrative Rulings are issued

by the Department of the Treasury’s Office of the Assistant

Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

for the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

May 1, 2023 

Bulletin No. 2023–18

Part I

Section 174.—Amortization

of Research and

Experimental Expenditures

26 CFR 1.174-1: Research and experimental expenditures; in general.

(Also §§ 446, 7805(b)(8); 1.174-3, 1.446-1,

301.7805-1).

Rev. Rul. 2023-8

This revenue ruling obsoletes Rev. Rul.

58-74, 1958-1 C.B. 148.

LAW AND ANALYSIS

Section 13206 of Public Law 115-97,

131 Stat. 2054 (Dec. 22, 2017), commonly referred to as the Tax Cuts and Jobs

Act (TCJA), amended § 174 of the Internal Revenue Code (Code) effective for

amounts paid or incurred in taxable years

beginning after December 31, 2021.1

For amounts paid or incurred in taxable

years beginning on or before December 31, 2021, former § 174(a) permitted

a taxpayer to currently deduct research

or experimental expenditures that were

paid or incurred during the taxable year

in connection with its trade or business

(expense method). Alternatively, a taxpayer could elect to defer and amortize

these expenditures under former § 174(b).

If expenditures were neither currently

deducted nor deferred and amortized, they

had to be charged to capital account. See

§ 1.174-1.

If the expense method was adopted for

amounts paid or incurred in taxable years

beginning on or before December 31,

2021, it had to be used for all qualifying

expenditures in the taxable year adopted

and for all subsequent years, unless the

Commissioner of Internal Revenue or the

Commissioner’s delegate (Commissioner)

consented to a different method for all

or part of the expenditures under former

§ 174(a)(3). See § 1.174-3(a). A taxpayer on a different method could apply

for permission to change to the expense

method for all or part of the expenditures

by submitting a written application to

the Internal Revenue Service (IRS). See

§ 1.174-3 and section 7.01 of Rev. Proc.

2022-14, 2022-7 I.R.B. 502.

Rev. Rul. 58-74 provides that if a

taxpayer adopted the expense method

but failed to deduct expenses relating

to the cost of obtaining a patent or other

items of research or experimental expenditures for prior taxable years to which

the expense method is applicable, the

taxpayer should file a claim for refund

or amended return to deduct additional

research or experimental expenditures in

the year or years when the expenditures

were paid or accrued. Rev. Rul. 58-74 further provides that the additional research

or experimental expenditures cannot be

treated as deferred and amortized under

former § 174(b) or chargeable to capital account and subsequently amortized

or written off upon abandonment of the

project or projects because the Commissioner’s consent to change a method of

accounting was not obtained. Accordingly, the deduction for the additional

research or experimental expenditures

could be lost if the period of limitations

on claims for credit or refund under

§ 6511 has expired and amended returns

could not be timely filed.

Section 13206(a) of the TCJA amended

former § 174 to require research or experimental expenditures (for amounts paid or

incurred in taxable years beginning after

December 31, 2021) to be charged to capital account and amortized ratably over

the five-year period (or the 15-year period

in the case of any specified research or

experimental expenditures which are

attributable to foreign research) beginning with the midpoint of the taxable

year in which the specified research or

experimental expenditures were paid or

incurred. The rationale of the Department

of the Treasury (Treasury Department) and

the IRS for obsoleting Rev. Rul. 58-74 is

independent of the removal of the expense

method by the TCJA amendments to former § 174.

Pursuant to the authority provided

under § 301.7805-1 of the Procedure

and Administration Regulations, the

Treasury Department and the IRS periodically obsolete rulings that are no longer

determinative because: (1) the applicable

statutory provisions or regulations have

been changed or repealed; (2) the ruling

position is specifically covered by a statute, regulation, or subsequent published

position; or (3) the facts set forth no longer exist or are not sufficiently described

to permit clear application of the current

statute and regulations.

The Treasury Department and the IRS

are obsoleting Rev. Rul. 58-74 because

there are insufficient facts in the ruling to

properly analyze whether the taxpayer’s

failure to deduct certain research or experimental expenditures, such as the cost of

obtaining a patent, when it deducted other

research or experimental expenditures,

constituted a method of accounting or an

error. For example, Rev. Rul. 58-74 does

not explain whether the taxpayer consistently treated the costs of obtaining a patent

in determining its taxable income. See

Huffman v. Commissioner, 126 T.C. 322,

354 (2006), aff’d, 518 F.3d 357 (6th Cir.

2008) (“[I]t is the consistent treatment of

an item involving a question of timing that

establishes such treatment as a method of

accounting.”). Rev. Rul. 58-74 also fails to

describe the cause and extent of the deviation in the treatment of certain research or

experimental expenditures that were not

deducted. See § 1.446-1(e)(2)(ii)(b).

Whether a change in accounting treatment of amounts paid or incurred for

research or experimentation expenditures

constitutes a change in method of accounting or the correction of an error depends on

the specific facts of a particular situation.

If the facts demonstrate that a taxpayer has

a change in method of accounting, then

filing an amended return, refund claim, or

administrative adjustment request under

§ 6227 (AAR), as applicable, in reliance

upon Rev. Rul. 58-74 would conflict with

the statutory requirement that a taxpayer

must secure the consent of the Commis-

Unless otherwise specified, all “section” or “§” references are to sections of the Code or the Income Tax Regulations (26 CFR part 1) and references to “former § 174” are to § 174 as in

effect immediately prior to the effective date of the amendments made by § 13206 of the TCJA.

1

Bulletin No. 2023–18

801

May 1, 2023

sioner to change a method of accounting.

See § 446(e), former § 174(a)(3), § 1.1743(b), and § 1.174-4(b), as applicable,

for the taxable years in which former

§ 174 was in effect. In addition, filing an

amended return, refund claim, or AAR,

as applicable, in reliance upon Rev. Rul.

58-74 in such a case would be inconsistent

with the IRS’s position that a taxpayer may

not, without prior consent, retroactively

change from an erroneous to a permissible

method of accounting by filing amended

returns. See § 446(e); § 1.446-1(e)(2)(i);

Capital One Fin. Corp. v. Commissioner,

659 F.3d 316, 322-23 (4th Cir. 2011); Diebold Inc. v. United States, 891 F.2d 1579,

1583 (Fed. Cir. 1989), cert. denied, 498

U.S. 823 (1990). Lastly, filing an amended

return, refund claim, or AAR, as applicable, in reliance upon Rev. Rul. 58-74 in

such a case would be inconsistent with

the automatic change procedure for a

taxpayer changing from treating research

or experimental expenditures under any

provision of the Code other than § 174 to

treating such expenditures under former

§ 174 and the regulations thereunder. See

section 7.01(2)(a)(iv) of Rev. Proc. 202214. For these reasons, Rev. Rul. 58-74 is

no longer determinative.

May 1, 2023

EFFECT ON OTHER REVENUE

RULINGS

Rev. Rul. 58-74 is obsoleted.

PROSPECTIVE APPLICATION

Pursuant to § 7805(b), Rev. Rul. 58-74

is obsoleted as of July 31, 2023. The

obsoletion of Rev. Rul. 58-74 does not

affect the characterization of the costs

of obtaining a patent in § 1.174-2(a)(1).

Furthermore, the obsoletion of Rev. Rul.

58-74 does not affect the specific rules for

changing a method of accounting under

former § 174 and the regulations under

former § 174, including the requirement

that such change be implemented on a

cut-off basis. See former § 174(a)(3),

§ 1.174-3(b)(2), and § 1.174-4(a)(5).

A taxpayer may file a claim for refund,

amended return, or AAR, as applicable, in

reliance on Rev. Rul. 58-74 if the taxpayer

is (1) claiming a deduction for additional

research or experimental expenditures to

which the expense method under former

§ 174(a) is applicable for the taxable year

or years in which they were improperly

deferred or capitalized, (2) otherwise

using the expense method for such tax-

802

able year or years, and (3) timely filing the

claim for refund, amended return, or AAR

not later than July 31, 2023. The eligibility to file a claim for refund, an amended

return, or an AAR in reliance on Rev.

Rul. 58-74 does not imply that the IRS

will grant such claim for refund, amended

return, or AAR. The IRS will continue to

challenge the applicability of Rev. Rul.

58-74 to a particular claim for refund,

amended return, or AAR when appropriate. For example, the IRS may challenge

the applicability of Rev. Rul. 58-74 when

the taxpayer’s facts in the amended return,

refund claim, or AAR are distinguishable

from Rev. Rul. 58-74, including where

the taxpayer failed to adopt the expense

method under former § 174(a).

DRAFTING INFORMATION

The principal author of this revenue

ruling is Bruce Chang of the Office of

Associate Chief Counsel (Income Tax

& Accounting). For further information

regarding this revenue ruling, contact Mr.

Chang at (202) 317-4870 (not a toll-free

number).

Bulletin No. 2023–18

Part III

Update for Weighted

Average Interest Rates,

Yield Curves, and Segment

Rates

Notice 2023-33

This notice provides guidance on the

corporate bond monthly yield curve, the

corresponding spot segment rates used

under § 417(e)(3), and the 24-month average segment rates under § 430(h)(2) of the

Internal Revenue Code. In addition, this

notice provides guidance as to the interest rate on 30-year Treasury securities

under § 417(e)(3)(A)(ii)(II) as in effect for

plan years beginning before 2008 and the

30-year Treasury weighted average rate

under § 431(c)(6)(E)(ii)(I).

YIELD CURVE AND SEGMENT

RATES

Section 430 specifies the minimum

funding requirements that apply to single-employer plans (except for CSEC plans

Applicable Month

April 2023

under § 414(y)) pursuant to § 412. Section

430(h)(2) specifies the interest rates that

must be used to determine a plan’s target

normal cost and funding target. Under

this provision, present value is generally

determined using three 24-month average

interest rates (“segment rates”), each of

which applies to cash flows during specified periods. To the extent provided under

§ 430(h)(2)(C)(iv), these segment rates

are adjusted by the applicable percentage

of the 25-year average segment rates for

the period ending September 30 of the

year preceding the calendar year in which

the plan year begins.1 However, an election may be made under § 430(h)(2)(D)

(ii) to use the monthly yield curve in place

of the segment rates.

Notice 2007-81, 2007-44 I.R.B. 899,

provides guidelines for determining the

monthly corporate bond yield curve, and

the 24-month average corporate bond

segment rates used to compute the target

normal cost and the funding target. Consistent with the methodology specified in

Notice 2007-81, the monthly corporate

bond yield curve derived from March 2023

data is in Table 2023-3 at the end of this

notice. The spot first, second, and third segment rates for the month of March 2023

are, respectively, 5.00, 5.20, and 5.15.

The 24-month average segment rates

determined under § 430(h)(2)(C)(i)

through (iii) must be adjusted pursuant

to § 430(h)(2)(C)(iv) to be within the

applicable minimum and maximum percentages of the corresponding 25-year

average segment rates. For this purpose,

any 25-year average segment rate that is

less than 5% is deemed to be 5%. The

25-year average segment rates for plan

years beginning in 2022 and 2023 were

published in Notice 2021-54, 2021-41

I.R.B. 457, and Notice 2022-40, 2022-40

I.R.B. 266, respectively. The applicable

minimum and maximum percentages are

95% and 105% for a plan year beginning

in 2022 or 2023.

24-MONTH AVERAGE CORPORATE

BOND SEGMENT RATES

The three 24-month average corporate

bond segment rates applicable for April

2023 without adjustment for the 25-year

average segment rate limits are as follows:

24-Month Average Segment Rates Without 25-Year Average Adjustment

First Segment

Second Segment

2.68

3.93

The adjusted 24-month average segment rates set forth in the chart below

reflect § 430(h)(2)(C)(iv) of the Code. The

24-month averages applicable for April

2023, adjusted to be within the applicable

minimum and maximum percentages of

Third Segment

4.12

the corresponding 25-year average segment rates in accordance with § 430(h)(2)

(C)(iv) of the Code, are as follows:

Adjusted 24-Month Average Segment Rates

For Plan Years

Beginning In

Applicable Month

First Segment

Second Segment

Third Segment

2022

April 2023

4.75

5.18

5.92

2023

April 2023

4.75

5.00

5.74

30-YEAR TREASURY SECURITIES

INTEREST RATES

Section 431 specifies the minimum funding requirements that apply

to multiemployer plans pursuant to

§ 412. Section 431(c)(6)(B) specifies

a minimum amount for the full-funding limitation described in § 431(c)(6)

(A), based on the plan’s current liabil-

ity. Section 431(c)(6)(E)(ii)(I) provides

that the interest rate used to calculate

current liability for this purpose must

be no more than 5 percent above and

no more than 10 percent below the

Pursuant to § 433(h)(3)(A), the third segment rate determined under § 430(h)(2)(C) is used to determine the current liability of a CSEC plan (which is used to calculate the minimum amount

of the full funding limitation under § 433(c)(7)(C)).

1

Bulletin No. 2023–18

803

May 1, 2023

weighted average of the rates of interest

on 30-year Treasury securities during

the four-year period ending on the last

day before the beginning of the plan

year. Notice 88-73, 1988-2 C.B. 383,

provides guidelines for determining the

weighted average interest rate. The rate

of interest on 30-year Treasury securities for March 2023 is 3.77 percent. The

Service determined this rate as the average of the daily determinations of yield

on the 30-year Treasury bond maturing

in February 2053. For plan years beginning in April 2023, the weighted average

of the rates of interest on 30-year Treasury securities and the permissible range

of rates used to calculate current liability are as follows:

For Plan Years Beginning In

Treasury Weighted Average Rates

30-Year Treasury Weighted Average

Permissible Range 90% to 105%

April 2023

2.57

2.32 to 2.70

under § 417(e)(3)(D) are segment rates

computed without regard to a 24-month

average. Notice 2007-81 provides guidelines for determining the minimum

present value segment rates. Pursuant to

that notice, the minimum present value

segment rates determined for March 2023

are as follows:

MINIMUM PRESENT VALUE

SEGMENT RATES

In general, the applicable interest rates

Month

March 2023

Minimum Present Value Segment Rates

First Segment

Second Segment

5.00

5.20

DRAFTING INFORMATION

The principal author of this notice

is Tom Morgan of the Office of Associ-

May 1, 2023

ate Chief Counsel (Employee Benefits,

Exempt Organizations, and Employment

Taxes). However, other personnel from

the IRS participated in the development

804

Third Segment

5.15

of this guidance. For further information

regarding this notice, contact Mr. Morgan

at 202-317-6700 or Tony Montanaro at

626-927-1475 (not toll-free number).

Bulletin No. 2023–18

Table 2023-3

Monthly Yield Curve for March 2023

Derived from March 2023 Data

Maturity

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

19.0

19.5

20.0

Yield

5.21

5.16

5.10

5.05

4.99

4.95

4.91

4.88

4.87

4.87

4.89

4.91

4.94

4.97

5.01

5.05

5.08

5.12

5.15

5.18

5.21

5.23

5.25

5.27

5.28

5.29

5.30

5.30

5.31

5.31

5.31

5.30

5.30

5.29

5.29

5.28

5.28

5.27

5.26

5.26

Maturity

20.5

21.0

21.5

22.0

22.5

23.0

23.5

24.0

24.5

25.0

25.5

26.0

26.5

27.0

27.5

28.0

28.5

29.0

29.5

30.0

30.5

31.0

31.5

32.0

32.5

33.0

33.5

34.0

34.5

35.0

35.5

36.0

36.5

37.0

37.5

38.0

38.5

39.0

39.5

40.0

Bulletin No. 2023–18

Yield

5.25

5.24

5.24

5.23

5.23

5.22

5.22

5.21

5.21

5.20

5.20

5.19

5.19

5.19

5.18

5.18

5.18

5.17

5.17

5.17

5.17

5.17

5.16

5.16

5.16

5.16

5.16

5.15

5.15

5.15

5.15

5.15

5.14

5.14

5.14

5.14

5.14

5.14

5.14

5.14

Maturity

40.5

41.0

41.5

42.0

42.5

43.0

43.5

44.0

44.5

45.0

45.5

46.0

46.5

47.0

47.5

48.0

48.5

49.0

49.5

50.0

50.5

51.0

51.5

52.0

52.5

53.0

53.5

54.0

54.5

55.0

55.5

56.0

56.5

57.0

57.5

58.0

58.5

59.0

59.5

60.0

Yield

5.13

5.13

5.13

5.13

5.13

5.13

5.13

5.13

5.12

5.12

5.12

5.12

5.12

5.12

5.12

5.12

5.12

5.12

5.12

5.11

5.11

5.11

5.11

5.11

5.11

5.11

5.11

5.11

5.11

5.11

5.11

5.11

5.10

5.10

5.10

5.10

5.10

5.10

5.10

5.10

805

Maturity

60.5

61.0

61.5

62.0

62.5

63.0

63.5

64.0

64.5

65.0

65.5

66.0

66.5

67.0

67.5

68.0

68.5

69.0

69.5

70.0

70.5

71.0

71.5

72.0

72.5

73.0

73.5

74.0

74.5

75.0

75.5

76.0

76.5

77.0

77.5

78.0

78.5

79.0

79.5

80.0

Yield

5.10

5.10

5.10

5.10

5.10

5.10

5.10

5.10

5.10

5.10

5.09

5.09

5.09

5.09

5.09

5.09

5.09

5.09

5.09

5.09

5.09

5.09

5.09

5.09

5.09

5.09

5.09

5.09

5.09

5.09

5.09

5.09

5.09

5.09

5.09

5.08

5.08

5.08

5.08

5.08

Maturity

80.5

81.0

81.5

82.0

82.5

83.0

83.5

84.0

84.5

85.0

85.5

86.0

86.5

87.0

87.5

88.0

88.5

89.0

89.5

90.0

90.5

91.0

91.5

92.0

92.5

93.0

93.5

94.0

94.5

95.0

95.5

96.0

96.5

97.0

97.5

98.0

98.5

99.0

99.5

100.0

Yield

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.08

5.07

5.07

5.07

5.07

5.07

5.07

5.07

5.07

5.07

May 1, 2023

26 CFR 1.263(a)-3: Amounts paid to improve tangible property.

(Also Part I, §§ 162, 165, 167, 168, 263(a), 263A, and 446; 1.165-7(a)(2), 1.167(a)-11, 1.168(i)-1, 1.446-1.)

Rev. Proc. 2023-15

TABLE OF CONTENTS

SECTION 1. PURPOSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 807

SECTION 2. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 807

SECTION 3. SCOPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 808

.01 In general. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 808

.02 Application to entities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 809

.03 Exclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 809

SECTION 4. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 809

SECTION 5. NATURAL GAS TRANSMISSION AND DISTRIBUTION PROPERTY SAFE HARBOR

METHOD OF ACCOUNTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 810

.01 In general. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 810

.02 Safe harbor method for linear property—application to transmission property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 811

.03 Safe harbor method for linear property—application to distribution property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 811

.04 Safe harbor method for non-linear property—application to transmission and distribution property. . . . . . . . . . . . . . . . . . . 812

.05 Per se capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 812

.06 Aggregation requirements... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 814

.07 Safe harbor method for linear property—rules for distribution service line costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 817

.08 General asset accounts and transition rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 819

.09 Class life asset depreciation range system (CLADR) percentage repair allowance exclusion. . . . . . . . . . . . . . . . . . . . . . . . . 821

.10 Applicability of § 263A……... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 821

.11 Statistical sampling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 822

SECTION 6. CHANGE IN METHOD OF ACCOUNTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 822

.01 In general. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 822

.02 Statistical sampling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 822

.03 Extrapolation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 822

.04 Optional cut-off basis for first 3 taxable years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 822

.05 Automatic change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 822

SECTION 7. EFFECT ON OTHER DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 825

SECTION 8. EFFECTIVE DATE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 825

SECTION 9. PAPERWORK REDUCTION ACT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 825

SECTION 10. DRAFTING INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 826

APPENDIX A—UNIT OF PROPERTY AND MAJOR COMPONENT DEFINITIONS FOR

NON-LINEAR PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 827

SECTION 1. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 827

.01 In general. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 827

.02 Instrumentation and controls. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 827

.03 Scope. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 827

May 1, 2023

806

Bulletin No. 2023–18

SECTION 2. UNITS OF NON-LINEAR PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 827

.01 Compressor station property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 827

.02 Gas storage facility property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 827

.03 Measuring and regulating station property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 828

.04 Meters and regulators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 828

APPENDIX B—EXTRAPOLATION GUIDANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 829

SECTION 1. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 829

.01 In general. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 829

.02 Scope. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 829

SECTION 2. EXTRAPOLATION METHODOLOGY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .829

.01 Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 829

.02 Calculation methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 829

.03 Example. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 830

SECTION 1. PURPOSE

This revenue procedure provides a safe

harbor method of accounting that taxpayers may use to determine whether certain

expenditures to maintain, repair, replace,

or improve natural gas transmission and

distribution property must be capitalized

as improvements under § 263(a) of the

Internal Revenue Code (Code) or as the

costs of property produced by the taxpayer for use in its trade or business under

§ 263A, or are allowable as deductions

under § 162.1 This revenue procedure

also provides procedures for taxpayers to

obtain automatic consent to change their

method of accounting to the safe harbor

method of accounting permitted by this

revenue procedure.

SECTION 2. BACKGROUND

.01 Taxpayers that transmit and distribute natural gas pay or incur significant

expenditures to maintain, repair, replace,

and improve natural gas transmission

and distribution property. Generally,

whether these expenditures are allowable

as deductions under § 162 for repairs or

maintenance or must be capitalized under

§ 263(a) as improvements to property

depends on whether these expenditures

result in a betterment or restoration of the

property or adapt it to a new or different

use. See §§ 1.162-4 and 1.263(a)-3(d).

Whether these expenditures are capital1

ized under § 263A depends, generally, on

whether these expenditures are properly

allocable to property produced by the

taxpayer. See § 1.263A-1(a)(3). Applying capitalization principles to natural

gas transmission and distribution property can be particularly difficult, largely

because the property consists of a network

of interconnected assets. As a consequence, there often exists uncertainty as to

whether certain costs to maintain, repair,

replace, and improve parts or components

of such interconnected property are capital expenditures or expenses allowable as

deductions.

.02 To reduce uncertainty and associated disputes between taxpayers and

the IRS regarding whether expenditures

to maintain, repair, replace, or improve

natural gas transmission and distribution

property must be capitalized or are allowable as deductions, this revenue procedure

provides a “natural gas transmission and

distribution property safe harbor method

of accounting” or “NGSH Method” (as

defined under section 4.01 of this revenue procedure) for determining whether

certain costs of maintaining, repairing,

replacing, and improving natural gas

transmission and distribution property are

required to be capitalized under § 263(a)

or § 263A, or may be treated as ordinary

and necessary business expenses for which

a deduction is allowable under § 162(a).

.03 To apply the NGSH Method, a taxpayer must first classify its natural gas

transmission and distribution property

as either linear property (for example,

pipes, fittings, and valves) or non-linear

property (for example, compressors, regulators, and meters). If a taxpayer chooses

to use the NGSH Method for its linear

property, the taxpayer (1) must use the

“safe harbor method for linear property”

(as defined under section 4.02 of this revenue procedure) for all of the taxpayer’s

linear transmission and distribution property and (2) may choose to apply the “safe

harbor method for non-linear property”

(as defined under section 4.03 of this revenue procedure) for all of the taxpayer’s

non-linear transmission and distribution

property. However, if a taxpayer chooses

to use the NGSH Method for its non-linear

property, the taxpayer must use (1) the safe

harbor method for non-linear property for

all of the taxpayer’s non-linear transmission and distribution property and (2) the

safe harbor method for linear property for

all of the taxpayer’s linear transmission

and distribution property.

.04 The safe harbor method for linear property provides different rules for

linear transmission property (generally,

linear property that transmits natural gas

from production facilities to local distribution systems) and for linear distribution

property (generally, linear property that

distributes natural gas to local customers). For linear transmission property, the

safe harbor method for linear property

defines the appropriate units of transmis-

Unless otherwise specified, all “section” or “§” references are to sections of the Code or the Income Tax Regulations (26 CFR part 1).

Bulletin No. 2023–18

807

May 1, 2023

sion property and provides a simplified

rule for determining whether the costs of

replacing a portion of that unit of linear

transmission property must be capitalized

under §§ 263(a) and 263A. See section

5.02 of this revenue procedure. For linear distribution property, the safe harbor

method does not define units of property

but divides distribution property into

“distribution mains” and “distribution

service lines” and provides simplified

rules for determining whether the costs

of replacing distribution mains and the

costs of repairing, maintaining, replacing,

or improving distribution service lines

must be capitalized under §§ 263(a) and

263A. See sections 5.03 and 5.07 of this

revenue procedure. A taxpayer using the

safe harbor method for linear property is

required to use it for both its linear transmission property and its linear distribution

property.

.05 The safe harbor method for non-linear property defines units of property and

major components of non-linear transmission and distribution property and provides

that a taxpayer must capitalize the costs of

replacing a unit of non-linear property or

a major component of a unit of non-linear property under §§ 263(a) and 263A.

See section 5.04 of this revenue procedure

and Appendix A of this revenue procedure

(Appendix A). In addition, if a taxpayer

replaces a unit of non-linear property or

a major component of a unit of non-linear

property, the taxpayer must also capitalize

the costs of any repairs, maintenance, or

replacements that directly benefit or are

incurred by reason of the replacement of

the unit of non-linear property or major

component of the unit of non-linear property. Except as otherwise provided in

section 6.04 of this revenue procedure, if

a taxpayer chooses to use the safe harbor

method for non-linear property, the taxpayer must use this safe harbor method

for all its non-linear transmission and distribution property.

.06 This revenue procedure also provides “per se capitalization rules” that

apply to both linear and non-linear property. These per se capitalization rules

identify certain costs that a taxpayer

must treat as capital expenditures if the

taxpayer utilizes the NGSH Method.

See section 5.05 of this revenue procedure. For example, in general, a taxpayer

May 1, 2023

using the NGSH Method is required

to capitalize the costs of additions and

replacements that materially increase

capacity to one or more customers. See

sections 5.05(1)(b) and (2) of this revenue

procedure. Also, under the per se capitalization rules, a taxpayer using the NGSH

Method must capitalize the costs of:

(1) replacing all or part of property if the

taxpayer deducts a loss for the replaced

property (other than a casualty loss) or

takes the adjusted basis of the replaced

property into account in realizing gain or

loss resulting from a sale or exchange of

the replaced property; and (2) repairing

and replacing all or part of property for

which the taxpayer is required to take a

basis adjustment as a result of a casualty loss or relating to a casualty event.

These rules are referred to collectively as

the “disposition/loss per se capitalization

rules.” See section 5.05(1)(g) and (h) of

this revenue procedure.

.07 Replacements of natural gas transmission and distribution property often

involve dispositions of properties that

are replaced. These dispositions generally require taxpayers to recognize gain

or loss, or take a basis adjustment, thus

triggering the disposition/loss per se capitalization rules under the NGSH Method.

Accordingly, the NGSH Method would

not be useful without providing a mechanism to mitigate the effects of these

dispositions and the resulting application

of the disposition/loss per se capitalization rules to a taxpayer utilizing this safe

harbor method. Thus, a taxpayer using

the NGSH Method must include costs

capitalized under the NGSH Method in

general asset accounts as described under

§ 168(i)(4) and § 1.168(i)-1(l). See section 5.08 of this revenue procedure. The

use of general asset accounts limits (1) the

circumstances under which a taxpayer is

required to recognize a loss on the disposition of property, and (2) the circumstances

under which a taxpayer is required to take

a casualty loss or a basis adjustment as a

result of a casualty event. Therefore, the

inclusion of transmission and distribution

property in general asset accounts allows

a taxpayer to avoid triggering the disposition/loss per se capitalization rules. The

use of general asset accounts also allows

a taxpayer to continue to depreciate this

property after its disposition.

808

In addition, to facilitate the transition

to the use of general asset accounts, this

revenue procedure requires a taxpayer

using the NGSH Method to make a late

general asset account election under

§§ 168(i)(4) and § 1.168(i)-1(l) for natural

gas transmission and distribution property

that the taxpayer previously placed in service and owns at the beginning of its year

of change. See section 5.08(2) of this revenue procedure. Moreover, to incentivize

taxpayers to use the NGSH method and

to encourage taxpayers to change to the

NGSH method for their first taxable year

ending after May 1, 2023, this revenue

procedure provides a special transition

rule. Under this rule, if a taxpayer changes

to the NGSH Method for its first taxable

year ending after May 1, 2023, the taxpayer does not have to apply certain per

se capitalization rules to amounts paid or

incurred to replace or repair linear property or non-linear property, as applicable,

in taxable years ending on or before May

1, 2023. See section 5.08(3)(a) of this revenue procedure.

.08 The safe harbor method for linear property and the safe harbor method

for non-linear property are methods of

accounting under § 446. Section 446(e)

and § 1.446-1(e) require taxpayers to

secure the consent of the Commissioner

of Internal Revenue (Commissioner)

before changing a method of accounting

for Federal income tax purposes. Section

1.446-1(e)(3)(ii) authorizes the Commissioner to prescribe administrative

procedures setting forth the limitations,

terms, and conditions necessary to permit a taxpayer to obtain consent to

change a method of accounting. Section

6.05 of this revenue procedure provides

the procedures by which a taxpayer may

obtain automatic consent for a change

in method of accounting to use the safe

harbor method for linear property and

the safe harbor method for non-linear

property.

SECTION 3. SCOPE

.01 In general. Only a taxpayer that

meets both of the requirements of section

3.01(1) and (2) of this revenue procedure

may choose to apply the NGSH Method.

(1) The taxpayer has a depreciable

interest in natural gas transmission or dis-

Bulletin No. 2023–18

tribution property described in section 4

of this revenue procedure.

(2) The taxpayer pays or incurs costs

(other than costs described in section 3.03

of this revenue procedure) to maintain,

repair, replace, or improve the particular

property referenced in section 3.01(1) of

this revenue procedure.

.02 Application to entities. The determination of whether a taxpayer satisfies

the requirements of both section 3.01(1)

and (2) of this revenue procedure is made

separately with respect to each member of

a consolidated group and with respect to

each partnership, S corporation, or trust

(other than a grantor trust).

.03 Exclusions. The NGSH Method

does not apply to the following:

(1) The costs of property for the transmission, distribution, control, or storage

of natural gas at a marine liquefied natural

gas terminal capable of shipping or receiving liquid natural gas for import or export;

(2) The costs of enclosures or buildings

suitable for occupation;

(3) The costs of non-linear property that is not specifically identified in

Appendix A (for example, tools, fixtures,

furniture, computer equipment, and other

miscellaneous equipment);

(4) The costs of smart pipeline inspection gauges as defined in section 4.27 of

this revenue procedure; and

(5) The costs of cleaning pipeline

inspection gauges as defined in section

4.28 of this revenue procedure.

SECTION 4. DEFINITIONS

The following definitions apply solely

for purposes of this revenue procedure

(including its appendices):

.01 Natural gas transmission and distribution property safe harbor method of

accounting. “Natural gas transmission and

distribution property safe harbor method

of accounting” or “NGSH Method” means

the safe harbor method for linear property,

the safe harbor method for non-linear

property, and the other applicable rules

set out in this revenue procedure, collectively, regardless of whether the taxpayer

chooses to use both methods, or uses only

the safe harbor method for linear property.

.02 Safe harbor method for linear

property. “Safe harbor method for linear

property” means the method of accounting

Bulletin No. 2023–18

described in sections 5.02, 5.03, and 5.07

of this revenue procedure in conjunction

with the other applicable rules set forth in

this revenue procedure.

.03 Safe harbor method for non-linear property. “Safe harbor method for

non-linear property” means the method

of accounting described in section 5.04

of this revenue procedure in conjunction

with the other applicable rules set forth in

this revenue procedure.

.04 Natural gas transmission property. “Natural gas transmission property”

means real and personal property that

is used to transport, control, and store

natural gas at any point between (1) a

gas processing plant or custody transfer

point and (2) a city gate station or other

delivery point, generally connecting to

a natural gas distribution system. Gas

production wells, gathering lines, and

processing plants are not included in this

definition.

.05 Natural gas distribution property.

“Natural gas distribution property” means

real and personal property that is used to

transport, control, and store natural gas at

any point between (1) a city gate station

or other custody transfer point generally

connecting to a transmission system,

and (2) the customer gas meter or other

delivery point to the customer. For this

purpose, “natural gas distribution property” includes both (1) the city gate station

or other custody transfer point and (2) the

customer gas meter or other delivery point

to the customer.

.06 Linear property. “Linear property” means all natural gas transmission

and distribution property except non-linear property. Examples of linear property

include pipes, valves, tunnels, casing, and

fittings.

.07 Non-linear property. “Non-linear

property” means all natural gas transmission and distribution property that is

compressor station property, gas storage

facility property, measuring and regulating

station property, or meters or regulators,

wherever located. Examples of non-linear

property include compressors, tanks, liquefaction equipment, and structures.

.08 Work order. “Work order” means

a written document that identifies and

defines the scope of a specific project. A

work order may include repairs, maintenance, replacements, and/or improvements

809

to natural gas transmission or distribution

property.

.09 Blanket work order. “Blanket

work order” means a written document

that authorizes a project or projects over

a specific period of time, generally not

exceeding one year. A blanket work

order may include repairs, maintenance,

replacements, and/or improvements to

natural gas transmission or distribution

property.

.10 Replacement. “Replacement”

means the installation of property so that

existing property can be removed from

service, whether or not the existing property is physically removed. Generally,

a replacement made pursuant to a work

order is a single replacement for purposes

of this revenue procedure, regardless of

whether (1) the work is performed at the

same or different times, and (2) in the

case of linear property, the property that is

replaced is contiguous or noncontiguous.

Multiple replacements made under separate work orders or made pursuant to a

blanket work order may be aggregated for

purposes of applying the NGSH Method.

See section 5.06 of this revenue procedure

for the rules for aggregating costs related

to linear and non-linear transmission and

distribution property.

.11 City gate station. “City gate station”

means a measuring and regulating station

at which a distribution system receives

natural gas, generally from a transmission

system.

.12 Hydraulic subsystem. “Hydraulic

subsystem” means all linear transmission

property used to direct the flow of natural gas that is maintained within the same

operating pressure range in the shortest

section between any two of the following

points:

(1) a gas processing plant;

(2) a compressor station at a storage

facility;

(3) a compressor station not described

in section 4.12(2) of this revenue procedure (including between two compressor

stations described in this section 4.12(3));

(4) a regulator (including between two

regulators);

(5) the point where the taxpayer’s distribution system begins; or

(6) a custody transfer point where the

gas is delivered to or from another party.

For example, a regulator located between

May 1, 2023

another regulator and a compressor station

divides that section of linear transmission property into two separate hydraulic

subsystems, even if both subsystems are

maintained within the same operating

pressure range.

.13 Compressor station property.

“Compressor station property” means

property that supplies the energy to move

natural gas at increased pressure at storage facilities or in transmission lines,

including but not limited to compressors,

instrumentation and controls, meters,

regulators, measuring equipment, odorizing equipment, gas detection equipment,

electric supply equipment, equipment to

maintain pipeline quality gas, mounting

pads, buildings, and fencing or walls.

.14 Gas storage facility property. “Gas

storage facility property” means property

at an above ground or underground gas

storage facility, including a compressed or

liquefied natural gas storage facility, and

an underground storage facility in a salt

formation or a depleted well or well field.

Gas storage facility property does not

include property at a liquefied natural gas

marine terminal capable of shipping or

receiving liquefied natural gas for import

or export.

.15 Measuring and regulating station property. “Measuring and regulating

station property” means property at a

location that measures or regulates natural

gas, including but not limited to meters,

regulators, and gauges.

.16 Measuring equipment. “Measuring equipment” means equipment used to

measure the pressure or temperature of the

gas. As used in this revenue procedure, the

term does not include a meter that measures gas flow, as defined in section 4.23

of this revenue procedure.

.17 Instrumentation and controls.

“Instrumentation and controls” means the

analog and digital devices that measure,

monitor, or control the equipment at storage

facilities, compressor stations, and measuring and regulating stations (including city

gate stations). Instrumentation and controls

include SCADA (supervisory control and

data acquisition) equipment and measuring

and regulating equipment. As used in this

revenue procedure, however, instrumentation and controls do not include assets that

are treated as separate units of property (for

example, meters or regulators).

May 1, 2023

.18 Distribution main. “Distribution

main” means a distribution line that serves

as a common source of supply for more

than one distribution service line. “Distribution mains” means more than one

section of distribution main in a natural

gas distribution system.

.19 Distribution service line. “Distribution service line” means a line that carries

natural gas from the distribution main to

the customer gas meter.

.20 Distribution service line costs.

“Distribution service line costs” means

direct and indirect costs paid or incurred

to repair, maintain, replace, or improve

distribution service lines.

.21 Lateral line. “Lateral line” means a

line in a natural gas distribution or transmission system that branches away from

the central and primary part of the system.

.22 Compressor. “Compressor” means

a mechanical device for increasing the

pressure of gas.

.23 Meter. “Meter” means an instrument for measuring and indicating or

recording the flow of gas that has passed

through it.

.24 Regulator. “Regulator” means a

device that reduces the pressure in a gas

line and maintains the pressure within a

constant band.

.25 Well. “Well” means a cased bore

hole used for gas input or output for an

underground storage reservoir, including

a storage well.

.26 Equipment to maintain pipeline

quality gas. “Equipment to maintain

pipeline quality gas,” also known as

“purification equipment,” means equipment used to ensure that the gas moving

through a line is maintained within certain

parameter. This term includes, but is not

limited to, the equipment used to remove

liquids and impurities from the gas, and

the equipment used to heat or cool the gas

to make it suitable for movement through

the line.

.27 Smart pipeline inspection gauges.

“Smart pipeline inspection gauges,” also

known as “smart pigs,” are devices that

are equipped with sensors that gauge

the thickness of pipes they are traveling

through and detect cracks, fissures, erosion and other problems that may affect

the integrity of the pipeline. Smart pipeline

inspection gauges are not included within

the definition of natural gas transmission

810

or distribution property for purposes of

this revenue procedure.

.28 Cleaning pipeline inspection

gauges. “Cleaning pipeline inspection

gauges,” also known as “cleaning pigs,”

are devices that have brushes, scrapers,

or similar tools and are used for cleaning pipelines by removing sedimentation

and build-up that can impede the flow of

gas. Cleaning pipeline inspection gauges

are not included within the definition of

natural gas transmission or distribution

property for purposes of this revenue

procedure.

.29 Odorizing equipment. “Odorizing

equipment” means equipment that injects

an odorant or other additive into the gas

so that leaks can be detected by the sense

of smell.

.30 Gas detection equipment. “Gas

detection equipment” means equipment

that indicates the existence of natural gas

in a specific area.

.31 Electric supply equipment. “Electric supply equipment” means equipment

that supplies electricity to equipment at a

compressor station or gas storage facility,

including but not limited to generators,

batteries and chargers, and transformers.

.32 Liquefaction equipment. “Liquefaction equipment” means equipment that

is used in connection with the liquefaction

of natural gas, including but not limited to

cold boxes, heat exchangers, condensers,

and vaporizing units.

.33 Cathodic protection. “Cathodic

protection” means a technique to prevent

the corrosion of a metal surface by making

that surface the cathode of an electrochemical cell.

SECTION 5. NATURAL

GAS TRANSMISSION AND

DISTRIBUTION PROPERTY

SAFE HARBOR METHOD OF

ACCOUNTING

.01 In general.

(1) A taxpayer using the NGSH Method

must apply the safe harbor method for linear property provided in sections 5.02 and

5.03 of this revenue procedure to the direct

and indirect costs of replacing all its linear

transmission and distribution main property, including any unit of property rules

described therein. A taxpayer using the

NGSH Method must also apply the safe

Bulletin No. 2023–18

harbor method for distribution service line

costs as provided in section 5.07 of this

revenue procedure. Moreover, a taxpayer

using the NGSH Method may, but is not

required to, apply the safe harbor method

for non-linear property provided in section 5.04 of this revenue procedure to the

direct and indirect costs of repairing, maintaining, replacing, and improving all its

non-linear transmission and distribution

property, including the application of the

units of property and major components

described in Appendix A. In addition,

except as provided in section 5.08(3)

(a) of this revenue procedure, a taxpayer

using the NGSH Method must apply the

per se capitalization rules provided in section 5.05 of this revenue procedure and

the aggregation rules provided in section

5.06 of this revenue procedure to property subject to the NGSH Method. Finally,

a taxpayer using the NGSH Method

must include certain costs of natural gas

transmission and distribution property in

general asset accounts as provided in section 5.08 of this revenue procedure.

(2) Solely for purposes of this revenue

procedure, the IRS will respect a reasonable and consistently applied designation

of property by the taxpayer as either

transmission or distribution property for

Federal or State regulatory purposes,

whichever is applicable. If the taxpayer is

unregulated, the IRS will respect a reasonable and consistently applied designation

that the taxpayer uses for its books and

records.

(3) A taxpayer may not rely on the unit

of property definitions provided in this

revenue procedure for any other purpose

of the Code or regulations, including for

determining the unit of property under

other sections of the Code or determining the asset for depreciation purposes

(including placed in service, retirements,

dispositions, or classification under

§ 168(e) or Rev. Proc. 87-56, 1987-2 C.B.

674) for the same or similar type of assets.

(4) Amounts required to be capitalized under the NGSH Method are

capital expenditures and must be taken

into account through a charge to capital

account or basis. Amounts that are paid or

incurred for MACRS property and that are

capitalized under this NGSH Method are

accounted for in the manner described in

section 5.08 of this revenue procedure.

Bulletin No. 2023–18

.02 Safe harbor method for linear

property—application to transmission

property.

(1) Unit of property for linear transmission property. For purposes of this

revenue procedure, the unit of property

for linear natural gas transmission property is the linear property within each

hydraulic subsystem as defined in section 4.12 of this revenue procedure. If a

transmission segment is composed of two

or more parallel lines, each line between

each compressor station or other connection point is a separate unit of property. A

lateral line on a transmission line is not a

separate unit of property unless there is a

compressor station or regulator at the junction point between the lateral line and the

main transmission line. If a lateral line can

be treated as part of a unit of property with

more than one main transmission line, the

taxpayer should designate the main line

with which the lateral line is associated

and follow that designation consistently.

(2) Simplified rule for replacements of

linear transmission property. Whether a

taxpayer using the safe harbor method for

linear property must capitalize the cost of

a replacement of linear transmission property is determined by the length of the

line replaced. If more than 10 percent of

the length of the unit of linear transmission property is replaced, the cost of the

replacement must be capitalized under

§§ 263(a) and 263A. If 10 percent or less

of the length of the unit of linear transmission property is replaced, the cost of the

replacement is not required to be capitalized under § 263(a) or § 263A. The cost

of the replacement includes the direct and

indirect costs of replacing the pipe and

any associated linear property, including,

but not limited to, connectors, cathodic

protection, valves, casing, tunnels, instrumentation and controls, and structural

supports for such property.

(3) Blanket work orders.

(a) Allocation. To the extent a taxpayer cannot specifically identify whether

amounts charged to a blanket work order

are for a replacement of linear transmission property greater than 10 percent of

the unit of linear transmission property, the

taxpayer may use any reasonable method

to allocate costs charged to the blanket

work order if the reasonable method is

consistently applied by the taxpayer.

811

(b) De minimis charges. A taxpayer

that adheres to a policy that limits perevent charges under a blanket work

order to replacements of property costing $50,000 or less is not required to

capitalize the costs of replacing linear

transmission property charged to the blanket work order. Replacements of property

qualifying under this de minimis rule

are not taken into account in determining whether more than 10 percent of the

length of the unit of linear transmission

property is replaced under section 5.02(2)

of this revenue procedure or in applying

the aggregation requirement in section

5.06 of this revenue procedure.

.03 Safe harbor method for linear property—application to distribution property.

(1) In general. For purposes of determining whether the costs of replacing

linear distribution property must be capitalized under the NGSH Method, the

unit of linear distribution property is not

defined. Instead, the taxpayer must initially determine whether the costs are for

the replacement of distribution mains as

defined in section 4.18 of this revenue

procedure or are distribution service line

costs as defined in section 4.20 of this revenue procedure. To determine whether the

costs of replacing distribution mains must

be capitalized, the taxpayer must apply the

simplified rule provided in section 5.03(2)

of this revenue procedure. To determine

whether distribution service line costs

must be capitalized, the taxpayer must

apply the simplified rules provided in section 5.07 of this revenue procedure.

(2) Simplified rule for replacements of

distribution mains. Whether a taxpayer

using the safe harbor method for linear property must capitalize the cost of

replacing distribution mains is determined

by the length of the distribution mains

replaced. If more than four miles of distribution mains are replaced, the cost of

the replacement must be capitalized under

§§ 263(a) and 263A. If four miles or less

of distribution mains are replaced, the

cost of the replacement is not required to

be capitalized under § 263(a) or § 263A.

The cost of the replacement includes the

direct and indirect costs of replacing the

distribution mains and any associated linear property, including, but not limited to,

connectors, cathodic protection, valves,

casing, tunnels, instrumentation and con-

May 1, 2023

trols, and structural supports for such

linear property.

(3) Blanket work orders.

(a) Allocation. To the extent a taxpayer cannot specifically identify whether

amounts charged to a blanket work order

are for the replacement of distribution

mains greater than four miles, the taxpayer may use any reasonable method to

allocate costs charged to the blanket work

order if the reasonable method is consistently applied by the taxpayer.

(b) De minimis charges. A taxpayer

that adheres to a policy that limits perevent charges under a blanket work

order to replacements of property costing

$50,000 or less is not required to capitalize

the costs of distribution mains replacements charged to the blanket work order.

Replacements of property qualifying

under the de minimis rule in this section

5.03(3)(b) are not taken into account in

determining replacement length under

section 5.03(2) of this revenue procedure

or in applying the aggregation requirement

in section 5.06 of this revenue procedure.

.04 Safe harbor method for non-linear

property – application to transmission

and distribution property.

(1) Applicability. A taxpayer may use

the safe harbor method for non-linear

property only if the taxpayer uses the safe

harbor method for linear property. However, a taxpayer is not required to apply

the safe harbor method for non-linear

property if it uses the safe harbor method

for linear property. If a taxpayer does not

use the safe harbor method for non-linear

property, then the taxpayer must apply

§§ 162, 263(a), 263A, and the regulations

thereunder to determine the appropriate

units of property for its non-linear property and to determine whether amounts

paid or incurred to repair, maintain,

replace, or improve these units of property

must be capitalized.

(2) Units of property under the safe

harbor method for non-linear property.

For purposes of applying the safe harbor

method for non-linear property, the units

of property and corresponding major

components of non-linear property are

identified in Appendix A. A taxpayer that

uses a unit of property definition provided

in Appendix A must also use the major

component definitions provided in Appendix A for that unit of property. Similarly,

May 1, 2023

a taxpayer that uses a major component

definition provided in Appendix A must

also use the unit of property definition

provided in Appendix A associated with

that major component.

(3) Simplified rule for replacements

of non-linear property. The safe harbor

method for non-linear property applies to

the direct and indirect costs paid or incurred

to repair, maintain, replace, or improve

the taxpayer’s non-linear transmission

and distribution property. If the taxpayer

replaces a unit of non-linear property or

a major component of a unit of non-linear

property as identified in Appendix A, then

the taxpayer must capitalize the amounts

paid to replace the unit of non-linear property or major component of the unit of

non-linear property under §§ 263(a) and

263A. In addition, if a taxpayer replaces a

unit of non-linear property or a major component of a unit of non-linear property, the

taxpayer must also capitalize the costs of

any repairs, maintenance, or replacements

that directly benefit or are incurred by

reason of the replacement of the unit of

non-linear property or major component

of the unit of non-linear property. If the

taxpayer pays or incurs amounts to repair,

maintain, replace, or improve non-linear

transmission or distribution property, but

does not replace either a unit of non-linear

property or a major component of a unit of

non-linear property as part of these activities, then the taxpayer is not required to

capitalize the amounts paid or incurred for

such activities under § 263(a) or § 263A.

However, if a taxpayer pays or incurs

amounts to repair, maintain, replace, or

improve its non-linear transmission or distribution property, and these costs relate

to per se capital expenditures described

under section 5.05 of this revenue procedure, then the amounts paid or incurred

must be capitalized under section 5.05 of

this revenue procedure.

.05 Per se capital expenditures.

(1) In general. Except as provided in

section 5.08(3)(a) of this revenue procedure, a taxpayer using the NGSH Method

must capitalize the direct and indirect

costs described in section 5.05(1)(a)

through (j) of this revenue procedure to

the extent these costs are paid or incurred

with respect to linear property or non-linear property subject to the NGSH Method,

notwithstanding any other provision of

812

this revenue procedure. Per se capital

expenditures include:

(a) The costs of property necessary to

add one or more new customers;

(b) The costs of materially increasing

capacity of the property to one or more

existing or potential customers (see section 5.05(2) of this revenue procedure

for the application of this rule to linear

property);

(c) The costs of adding a unit of non-linear property or adding a major component

of a unit of non-linear property other than

as a replacement, as defined in section

4.10 of this revenue procedure, for an

existing major component;

(d) The costs of property that extends

a transmission or distribution system (see

section 5.05(3) of this revenue procedure

for the application of this rule to the costs

of additional linear property required to

relocate or replace an existing line);

(e) The costs of property that adds

cathodic protection, protective wrapping,

or protective coating to linear property;

(f) The costs of adding instrumentation

and control equipment, including remote

actuation or monitoring equipment, to

property that did not previously have similar equipment; for these purposes, new

instrumentation and control equipment

is not similar if it provides additional

functionality;

(g) The costs of replacing all or part of

property if the taxpayer deducts a loss for

the replaced property (other than a casualty loss), or takes the adjusted basis of

the replaced property into account in realizing gain or loss resulting from a sale or

exchange of the replaced property;

(h) The costs of repairing or replacing

all or part of property as a result of damage for which the taxpayer is required to

take a basis adjustment as a result of a

casualty loss under § 165, or relating to a

casualty event described in § 165;

(i) The costs of easements or other

rights in real property; and

(j) The costs of adapting property to a

new or different use.

(2) Materially increasing capacity of

linear property.

(a) Determining materiality. For purposes of applying section 5.05(1)(b) of

this revenue procedure to linear transmission property or linear distribution

property, an expenditure for linear prop-

Bulletin No. 2023–18

erty materially increases capacity to one

or more existing or potential customers

if the work performed increases capacity by more than five percent to one or

more existing or potential customers.

In the case of transmission property, an

increase in capacity is determined based

on the increase in the capacity of the

hydraulic subsystem, measured in terms

of millions of cubic feet per day. In the

case of distribution property, an increase

in capacity is determined based on the

increase in the throughput of gas to one

or more existing or potential customers

served or to be served by the added or

replaced property, measured in terms

of thousands of cubic feet per hour. For

purposes of section 5.05(1)(b) of this revenue procedure, an increase in capacity

does not include amounts paid to return

linear property to its original capacity

prior to any wear, tear, or other damage

necessitating such expenditure.

(b) Taxpayer’s purpose. A taxpayer is

not required to capitalize costs that materially increase capacity to linear property

under section 5.05(2)(a) of this revenue

procedure if the taxpayer can establish

with reasonable certainty, through its

books and records, that the principal purpose of an addition or replacement of

linear property was for safety reasons, to

standardize its system, or to comply with

regulatory requirements, unrelated to

increasing capacity. However, these costs

may be subject to capitalization under

sections 5.02, 5.03, or 5.07 of this revenue

procedure or other per se capitalization

rules under this section 5.05.

(3) Property that extends a system.

For purposes of applying section 5.05(1)

(d) of this revenue procedure, the cost of

property that extends a transmission or

distribution system does not include the

cost of additional linear property required

to relocate or replace an existing line that

will continue to run between the same

two endpoints. However, if more than 10

percent of the length of the original unit

of property is replaced, in the case of a

replacement of linear transmission property, the costs of the replacement must

be capitalized under section 5.02(2) of

this revenue procedure. If more than four

miles of distribution mains is replaced, in

the case of a replacement of distribution

mains, the cost of the replacement must be

Bulletin No. 2023–18

capitalized under section 5.03(2) of this

revenue procedure.

(4) Special rule for identified distribution service line costs associated with

distribution mains. If the taxpayer can

identify with reasonable accuracy distribution service line costs associated with

distribution main costs that are treated

as per se capital expenditures under this

section 5.05, then the identified distribution service line costs are also treated

as per se capital expenditures under this

section 5.05. For rules regarding identified and unidentified distribution service

line costs, see section 5.07 of this revenue procedure.

(5) Coordination with other rules.

Replacements of property for which

the replacement costs are per se capital expenditures under this section 5.05

are not taken into account in determining whether more than 10 percent of the

length of the unit of linear transmission

property is replaced for purposes of applying section 5.02 of this revenue procedure,

or in determining whether more than four

miles of distribution mains are replaced

for purposes of section 5.03 of this revenue procedure.

(6) Examples. The following examples

illustrate the application of this section

5.05. In each example, it is assumed that

(a) the taxpayer is a corporation and files

its Federal income tax return on an accrual

method and a calendar year basis, (b) the

taxpayer uses the safe harbor method for

linear property and the safe harbor method

for non-linear property for all its natural

gas transmission and distribution property, and (c) the taxpayer does not make

an election under § 1.168(i)-1(e)(3)(ii)

(disposition of all assets remaining in a

general asset account) or § 1.168(i)-1(e)(3)

(iii) (disposition of an asset in a qualifying

disposition). In addition, for the following

examples, it is assumed that none of the

aggregation requirements of section 5.06

of this revenue procedure apply.

(a) Example 1. (i) Z is a local natural gas distribution company that supplies gas to an industrial

customer via a three-inch diameter distribution service line. Due to planned expansion of its facility, the

customer will require more gas than can be supplied

via the existing line. Z’s records include correspondence with the customer indicating that Z agreed to

install a second three-inch distribution service line

and a second meter to meet the customer’s need for

additional gas at its facility. As a result of Z’s installation of a second three-inch distribution service line,

813

throughput of gas to the customer is increased by 100

percent.

(ii) The cost of installing the second distribution

service line is a per se capital expenditure under section 5.05(1)(b) of this revenue procedure because it

increases Z’s capacity to its customer by more than

five percent and Z’s records reflect that the distribution service line is added for the principal purpose

of increasing capacity to Z’s customer. The cost of

installing a second meter must be capitalized under

the per se capitalization rule in section 5.05(1)(c) of

this revenue procedure because the new meter is an

addition of a unit of non-linear property defined in

section 2.04 of Appendix A.

(b) Example 2. Y is a natural gas transmission

company that owns and operates a natural gas transmission pipeline that is 300 miles in length. Section

A of this pipeline runs for 80 miles between two

compressor stations, and is a hydraulic subsystem

that is a unit of property. The pipe in Section A is 12

inches in diameter, except for a seven-mile segment

that is 10 inches in diameter. Y incurs costs to replace

the seven-mile 10-inch segment with 12-inch pipe

in order to increase the capacity of Section A. As a

result of the replacement, the capacity of Section A

to Y’s customers, as measured in terms of millions

of cubic feet of gas per day, increased by more than

five percent. In addition, Y’s records do not specifically indicate a principal purpose for replacing the

seven-mile segment. Accordingly, the cost of replacing the existing 10-inch transmission line with the

larger 12-inch transmission line must be capitalized

as a per se capital expenditure under section 5.05(1)

(b) of this revenue procedure.

(c) Example 3. X is a natural gas transmission

company that owns and operates a natural gas transmission pipeline that is 300 miles in length. Section

B of this transmission pipeline runs for 80 miles

between two compressor stations and is a hydraulic subsystem that is a unit of property. The pipe in

Section B is 10 inches in diameter. X replaces seven

miles of Section B with 12-inch pipe. As a result

of the replacement, the capacity of Section B to

X’s customers, as measured in terms of millions of

cubic feet of gas per day, increased by two percent.

Because the replacement did not result in an increase

in Section B’s capacity by more than five percent,

the cost of replacing the seven miles of pipe is not

a per se capital expenditure under section 5.05(1)

(b) of this revenue procedure and, because less than

10 percent of Section B (7 miles out of 80 miles =

8.8 percent) is replaced, the cost is not required to

be capitalized under section 5.02(2) of this revenue

procedure.

(d) Example 4. (i) W is a local natural gas distribution company that supplies gas to a group of

existing customers via an older three-inch diameter

distribution main and individual distribution service

lines. Pursuant to regulatory requirements, W performs regular safety risk assessments that take into

account the age and composition of the pipeline at

various locations. Based on this safety assessment,

W determines it is necessary to replace three miles of

distribution mains. The distribution main is replaced

with four-inch diameter pipe, which is one of the

standard sizes currently used by W for all distribution

main replacements. W’s books and records indicate

that the principal purpose of the replacement was the

May 1, 2023

result of the safety risk assessment. W can identify

with reasonable accuracy the distribution service line

costs that are associated with the distribution mains

replacement.

(ii) Pursuant to section 5.05(2)(b) of this revenue

procedure, the cost to replace the distribution main is

not a per se capital expenditure under section 5.05(1)

(b) of this revenue procedure because the taxpayer’s

books and records indicate that the principal purpose

of the distribution main replacement was to reduce

safety risk. Additionally, because the length of the

distribution main replacement is less than four miles,

the cost of the distribution main replacement is not

required to be capitalized under section 5.03(2) of

this revenue procedure. Similarly, because W can

identify the costs of replacing the distribution service lines with the distribution main replacement, the

cost of replacing the associated distribution service

lines is not a per se capital expenditure under section 5.05(1)(b) of this revenue procedure and is not

required to be capitalized under section 5.07(2)(b)(ii)

of this revenue procedure.

(e) Example 5. (i) V is a local natural gas distribution company that supplies natural gas to a group of

existing customers at the edge of its service area via

three miles of three-inch diameter distribution main,

and individual distribution service lines. V’s records

reflect that certain customers were experiencing gas

delivery issues. Consequently, V replaces the entire

three-mile segment with four-inch diameter pipe,

as well as the associated service lines. V’s books

and records do not indicate any principal purpose

of replacing the three-mile segment of distribution

main other than to address its customer’s gas delivery issues. V’s replacement of the three-mile segment

of distribution main increased the throughput of gas

to its existing customers by seven percent.

(ii) Because the replacement of the distribution

main results in an increase in the throughput of gas

to the customers served by the distribution main

of more than five percent, the cost to replace the

three miles of distribution mains is a per se capital

expenditure under section 5.05(1)(b) of this revenue procedure. Additionally, because the cost of

the distribution main replacement is a per se capital

expenditure, the cost of replacing the associated distribution service lines is a per se capital expenditure

under sections 5.05(4) and 5.07(2)(a) of this revenue

procedure.

(f) Example 6. (i) U is a local natural gas distribution company that owns and operates 160 miles of

distribution mains. U’s distribution mains currently

include one-, two-, three-, and four-inch diameter

pipe. The diameters and materials vary depending on

the year of installation. U is currently standardizing

its distribution mains by using pipe in two-inch and

four-inch diameters. Any distribution main pipe that

is replaced is replaced with one of these two standard

sizes. U replaces 875 feet of three-inch diameter pipe

with four-inch diameter pipe, which had the effect of

increasing its throughput to one or more existing or

potential customers by more than five percent. U’s

books and records indicate that its use of the larger

diameter pipe was necessary to standardize its system with currently available sizes of pipe.

(ii) Because U’s books and records indicate that

the replacement is made to standardize its system,

pursuant to section 5.05(2)(b) of this revenue pro-

May 1, 2023

cedure, the cost of the replacement is not a per se

capital expenditure under section 5.05(1)(b) of this

revenue procedure. Finally, because less than four

miles of the distribution main pipe is replaced, the

cost of the replacement is not required to be capitalized under section 5.03(2) of this revenue procedure.

(g) Example 7. (i) T is a local natural gas distribution company that owns and operates 160 miles

of natural gas distribution mains. T’s distribution

mains include iron pipe and polyethylene pipe. T is

currently using polyethylene pipe when it needs to

replace pipe in its distribution mains because it considers polyethylene pipe to be better pipe for several

reasons. T replaces three miles of four-inch diameter iron pipe in its distribution mains with four-inch

diameter polyethylene pipe. There is no change in

the throughput of gas to customers served by the distribution main as a result of this replacement.

(ii) The cost of the replacement is not a per se

capital expenditure under section 5.05(1)(b) of this

revenue procedure because the replacement does not

materially increase capacity to one or more existing

or potential customers. Additionally, because the

distribution main replacement is for four miles or

less, the cost of the replacement is not required to

be capitalized under section 5.03(2) of this revenue

procedure.

(h) Example 8. S, a local natural gas distribution

company, is required to relocate a distribution main

to accommodate construction of a road. In order to

reroute its distribution main around the construction

site, S replaces one mile of pipe and also adds 1,000

feet of pipe to the distribution system. Notwithstanding the addition of pipe to the distribution system,

the cost of the relocation is not a per se capital

expenditure under section 5.05(1)(d) of this revenue procedure because the pipeline continues to run

between the same two endpoints. Additionally, the

cost of the relocation is not required to be capitalized under section 5.03(2) of this revenue procedure

because the replacement of distribution main pipe is

four miles or less.

.06 Aggregation requirements.

(1) General rule. For purposes of determining whether the applicable thresholds

for capitalization of property provided in

sections 5.02, 5.03, and 5.04 of this revenue procedure are met, a taxpayer must

aggregate multiple replacements if all of

the following requirements are met:

(a) The replacements are within –

(i) the same unit of property, for

non-linear property and linear transmission property, or

(ii) the same five-digit United States

Postal Service ZIP Code delivery area, for

linear distribution property;

(b) The replacements are described in

one authorizing document, as defined in

section 5.06(2) of this revenue procedure;

and

(c) The authorizing document –

(i) identifies the property with respect

to which the replacements will occur

814

or the locations where property will be

replaced;

(ii) identifies the amount of pipe to be

replaced, or total cost of the replacements;

and

(iii) provides that the replacements are

expected to be completed within five years

after the date of the authorizing document.

If the authorizing document does not

provide a time period over which replacements will be completed, this requirement

will be considered to be met unless it is

determined upon original authorization

that it will take more than five years to

complete the replacements.

(2) Authorizing document.

(a) For purposes of this section 5.05 of

this revenue procedure, the term “authorizing document” means the following:

(i) a regulatory commission decision

that requires replacements as part of an

identified program aimed at a specific

purpose;

(ii) a written project authorization

aimed at a specific purpose;

(iii) a work order as defined under section 4.08 of this revenue procedure; or

(iv) a blanket work order as defined

under section 4.09 of this revenue procedure and which is aimed at a specific

purpose.

(b) A regulatory commission decision

does not include a decision, whether or

not designated as an “order,” that authorizes expenditures for replacements but

does not require replacements to be made.

(3) General and specific authorizing

documents. If replacements are described

by a general authorizing document as

well as one or more specific authorizing

documents (for example, a regulatory

commission decision and a written project

authorization implementing the regulatory commission decision), aggregation is

based on the most general authorizing document that meets the requirements

of section 5.06(1)(c) of this revenue procedure. For example, if a general authorizing

document provides that replacements are

not expected to be completed within five

years of this authorizing document, then

aggregation of the replacements pursuant to this authorizing document is not

required. However, if a subsequent more

specific authorizing document implementing that same program or project provides

that certain replacements are expected

Bulletin No. 2023–18

to be completed within five years of this

subsequent authorizing document, then

aggregation of the replacements described

in the subsequent authorizing document is

required, provided that the other requirements described in section 5.06(1) of this

revenue procedure are met.

(4) Aggregation of replacements across

multiple years. Multiple replacements that

meet the requirements described in section 5.06(1) of this revenue procedure

are aggregated without regard to whether

they are performed in one year or multiple

years.

(5) Modifications. Modifications to an

authorizing document, or to the work done

pursuant to an authorizing document, that

occur within the taxable year are taken

into account in determining whether to

aggregate replacements, and whether to

capitalize the expenditures, in that taxable

year, but do not affect the aggregation of

replacements pursuant to that authorizing

document in a prior taxable year.

(6) Anti-abuse rule. If a taxpayer acts

(a) to divide closely related transmission or distribution property replacement

projects into multiple written project

authorizations, work orders, or blanket

work orders or (b) to mischaracterize the

intended or expected scope of a project, in

order to avoid the application of the aggregation rules under this section 5.06, rather

than for non-tax business reasons, appropriate adjustments will be made by the

Commissioner to carry out the purposes

of this revenue procedure.

(7) Examples. The following examples

illustrate the application of this section

5.06. In each example, it is assumed that

(a) the taxpayer is a corporation and files

its Federal income tax return on an accrual

method and a calendar year basis, (b) the

taxpayer uses the safe harbor method for

linear property and the safe harbor method

for non-linear property for all its natural

gas transmission and distribution property, and (c) the taxpayer does not make

an election under § 1.168(i)-1(e)(3)(ii)

(disposition of all assets remaining in a

general asset account) or § 1.168(i)-1(e)

(3)(iii) (disposition of an asset in a qualifying disposition).

(a) Example 1. (i) R is a natural gas distribution

company in State A. The Public Utility Commission

(Regulator) of State A sets the rates and approves

tariffs for R. Regulator issues Rate Order 12345 as a

result of certain rate proceedings. Rate Order 12345

Bulletin No. 2023–18

allows for the incremental recovery of up to an

additional $30 million annually in revenue through

rates and tariffs. Rate Order 12345 states that these

dollars are for the recovery of incremental operating

expense, maintenance expense, and return on investment related to the replacement of distribution mains

in its natural gas distribution system; however, no

specific replacements are required, and Rate Order

12345 does not provide a time period over which

replacements will be completed. R makes annual

filings documenting such costs, which match revenue billed to incremental expense and include R’s

allowed return on investment. The specific distribution main replacements are determined by R based

on known conditions and risk analysis.

(ii) For purposes of determining whether the

replacement costs are capitalized under section 5.03

of this revenue procedure, aggregation of pipeline

replacements is not required under this section 5.06

because Rate Order 12345 (A) does not identify a

program aimed at a specific purpose for the replacements; (B) does not require specific replacements

to be made; (C) does not identify the property with

respect to which the replacements will occur or the

locations for the replacements; (D) does not identify

the amount of pipe or the total cost of the replacements; and (E) does not specify that the replacements

are within the same Zip Code. All these criteria must

be satisfied for the aggregation requirement of this

section 5.06 to apply to replacements performed

under Rate Order 12345.

(b) Example 2. Q is a local natural gas distribution company. Based on estimated general

maintenance and upgrade costs and anticipated revenues through its rates and tariffs, Q budgets $100

million during Year 1 for replacements within its

distribution system. For purposes of determining

whether the distribution main replacement costs are

capitalized under section 5.03 of this revenue procedure, an aggregation of pipeline replacements is not

required under this section 5.06 because Q’s budget document is not a written project authorization

aimed at a specific purpose.

(c) Example 3. P is a local natural gas distribution

company. P issues a blanket work order for replacements of less than 2,000 feet of distribution mains.

The blanket work order is used predominantly for the

repair of leaks, but does not establish a project aimed

at a specific purpose. P performs several replacements under the blanket work order to repair leaks.

For purposes of determining whether the replacement costs are capitalized under section 5.03 of this

revenue procedure, an aggregation of distribution

main replacements under the blanket work order is

not required under this section 5.06 because the blanket work order is not an authorizing document under

section 5.06(2) of this revenue procedure.

(d) Example 4. (i) O is a natural gas distribution

company in State B. Following an explosion near a

population center in State B that may be attributable

to Type L pipe deteriorating faster than anticipated,

Regulator issues an order in Year 1 requiring all

Type L pipe used in the transmission or distribution of natural gas or other combustible material in

State B to be replaced within five years to eliminate

a safety risk to State B citizens. The order also specifies procedures for applying for a special tariff to

support replacements of Type L pipe. In response to

815

this order, O’s management instructs its engineering

department to initiate a project to identify all Type

L pipe in its distribution system in State B. O issues

a written project authorization that will involve

a review of its purchases of Type L pipe, physical

identification of the pipe, and inspection of sections

of pipeline. As the locations of Type L pipe are identified, O prepares work orders to replace the Type L

pipe. In one ZIP Code delivery area, O identifies six

sections of Type L distribution mains, totaling eight

miles, and each of these sections are replaced under

six separate work orders, as they are identified. Each

work order identifies the location and the amount

of the distribution mains to be replaced. Each work

order is for a replacement of less than four miles of

distribution mains.

(ii) For purposes of determining whether the

replacement costs are capitalized under section

5.03 of this revenue procedure, the replacements

are not aggregated under this section 5.06 under the

Regulator’s order because, although the order is an

authorizing document within the meaning of section

5.06(2) of this revenue procedure, the order does not

identify the amount or costs of the distribution mains

to be replaced, as required by section 5.06(1)(c)(ii)

of this revenue procedure. Similarly, the replacements are not aggregated under the written project

authorization issued by O because the authorization

does not identify the amount or the costs of the distribution mains to be replaced. See section 5.06(1)

(c)(ii) of this revenue procedure. Rather, each of

the six work orders qualify as separate authorizing

documents under section 5.06(2) of this revenue

procedure and provides the information required in

section 5.06(1)(c). Because neither the Regulator’s

order nor the written project authorization meets the

requirements for aggregation under this section 5.06,

and each work order constitutes a separate authorizing document for the replacement of less than four

miles of distribution mains, the costs of the replacements are not required to be capitalized under section

5.03 of this revenue procedure.

(e) Example 5. (i) The facts are the same as in

Example 4, except that in response to the Regulator’s

order, in Year 1, O’s management issues a written

project authorization for the replacement of all Type

L pipe in County Z in State B, identifying the quantity and location of all Type L pipe in County Z, and

authorizing $2 million for this purpose. County Z

falls within two ZIP Code delivery areas, Area F and

Area G. The project authorization does not provide a

time period in which the replacements will be completed but there is no reason to expect that the project

will take longer than five years.

(ii) For purposes of determining whether the

replacement costs are capitalized under section 5.03

of this revenue procedure, the replacements are

aggregated under this section 5.06 pursuant to O’s

written project authorization, which authorizes the

replacement of distribution mains for a specific purpose and identifies the location of the replacements

and the amount of distribution mains to be replaced.

Accordingly, for each of the ZIP Code delivery

areas affected by the written project authorization,

replacements within that ZIP Code delivery area

that are covered by the written project authorization

are aggregated, even though the replacements may

be noncontiguous, may occur over more than a sin-

May 1, 2023

gle year, and may involve several work orders. The

aggregate replacements in Area F total seven miles,

and the aggregate replacements in Area G total three

miles. Accordingly, under section 5.03 of this revenue procedure, the replacement costs of distribution

mains in Area F are capitalized and the replacement

costs of distribution mains in Area G are not required

to be capitalized.

(f) Example 6. (i) The facts are the same as in

Example 4 except O knows that it also has Type L

pipe in its distribution systems in State Y. In response

to Regulator’s order, O issues a written project authorization authorizing its crews in State Y to replace all

Type L pipe that is more than 10 years old as Type

L pipe is encountered in the normal course of operations. It is reasonable to expect that the replacements

under this project authorization would not be completed within five years. During Year 2, O exceeds its

capital maintenance budget in State Y by $1 million.

A review of the work orders charged to the project

authorization during Year 2 indicates that O spent $2

million on replacing 12 miles of functional Type L

distribution mains. One work order authorized the

replacement of six miles of distribution mains at different locations within ZIP Code delivery Area H at

a cost of $ 1.2 million. The remaining three work

orders each authorized the replacement of two miles

of distribution mains at different locations within ZIP

Code delivery Area J.

(ii) For purposes of determining whether the

replacement costs are capitalized under section 5.03

of this revenue procedure, the replacements of Type

L distribution mains in State Y in Year 2 are not

aggregated under this section 5.06 under O’s written project authorization, because the written project

authorization does not specify the amount of mains

or the total cost of replacements, or the period over

which the replacements are to occur and it is reasonable to expect that the replacements will not be

completed within five years. However, the replacement of six miles of distribution mains pursuant to

the work order charged in Year 2 authorizing the

replacement of six miles of distribution mains at

specified locations within ZIP Code delivery Area

H is aggregated under this section 5.06 because this

work order meets the requirements of section 5.06(1)

of this revenue procedure and constitutes an authorizing document. See section 5.06(3) of this revenue

procedure. Although the other three work orders

are for replacements of distribution mains within

the same ZIP Code delivery area, these work orders

are not aggregated because they constitute separate authorizing documents. Because each of these

three work orders is for the replacement of less than

four miles of distribution mains, the costs of these

distribution main replacements are not required to

be capitalized under section 5.03 of this revenue

procedure.

(g) Example 7. (i) M is a natural gas distribution

company. M budgets $10 million for the replacement

of distribution mains that run through subdivisions

A and B, which are in ZIP code delivery area H. The

budget directs the work to be done through a written project authorization, which is issued in Year 1.

The work under the written project authorization is

reasonably expected to be completed in late Year 2

or early Year 3. The priority of replacements will

be determined based on risk assessments, but the

May 1, 2023

written project authorization calls for the eventual

replacement of five miles of distribution mains in

ZIP code delivery area H.

(ii) For purposes of determining whether the

replacement costs are capitalized under section

5.03 of this revenue procedure, aggregation is not

required by the general budget because the budget

does not qualify as an authorizing document under

section 5.06(2) of this revenue procedure. However,

the replacements done pursuant to the written project authorization are aggregated under this section

5.06 because the document is aimed at a specific

purpose, authorizes the replacement of a known

amount of distribution mains in a certain location

and, although it does not specify the time period over

which replacements will be completed, there is no

reason to expect that completing the replacements

will take longer than five years. Because the aggregate replacements of distribution mains within ZIP

Code area H total more than four miles, the costs to

replace the five miles of distribution mains are capitalized under section 5.03 of this revenue procedure.

(h) Example 8. (i) L is a natural gas transmission

company that operates a natural gas transmission

line in State C. In Year 1, L conducts an internal

inspection of a 100-mile section of the transmission

line, a hydraulic subsystem that is a separate unit of

property under section 5.02(1) of this revenue procedure. An analysis of the survey indicates that 11

miles (11 percent) of the pipe in this section should

be removed and replaced due to deterioration. In a

written project authorization issued in January of

Year 1, L’s management authorized $22 million to

replace the 11 miles of pipe and directed that the

work commence as soon as practicable. The project

is expected to be completed in Year 1. Based on a

study of actual deterioration in removed pipe versus

the deterioration shown by the inspection device, L’s

engineers determine in November of Year 1 that the

replacement of only nine miles (9 percent) is warranted. The replacement of the nine miles, which was

performed under two separate work orders, is completed in December of Year 1.

(ii) For purposes of determining whether the

replacement costs are capitalized under section 5.02

of this revenue procedure, the replacements are

required to be aggregated under this section 5.06

pursuant to the January, Year 1, authorization, which

meets the requirements of section 5.06(1) and (2) of

this revenue procedure. Under section 5.06(5) of this

revenue procedure, the aggregation determination is

based on the status of the written project authorization and the work done, or to be done, at the end of

each taxable year. As of the end of Year 1, it was

known that only nine miles of the transmission line

were replaced. Because the aggregated replacements

total less than 10 percent of the unit of linear transmission property, the cost of the replacements is not

required to be capitalized under section 5.02 of this

revenue procedure.

(i) Example 9. (i) The facts are the same as in

Example 8, except that the January Year 1 project

authorization required the replacement of only nine

miles (9 percent) of L’s 100-mile hydraulic subsystem. In November of Year 1, L’s engineers then

determined that a total of 11 miles (11 percent) had

to be replaced, and the replacement of 11 miles was

completed in December of Year 1.

816

(ii) For purposes of determining whether the

replacement costs are capitalized under section 5.02

of this revenue procedure, the replacement work

is aggregated pursuant to the January Year 1 project authorization, which meets the requirements of

section 5.06(1) and (2) of this revenue procedure.

Under section 5.06(5) of this revenue procedure,

the aggregation determination is based on the status of the written project authorization and the work

done, or to be done, at the end of each taxable year.

It was known as of the end of Year 1 that more than

10 percent of the unit of property was replaced, as

aggregated under this section 5.06 pursuant to the

January Year 1 project authorization. Accordingly,

the cost of the replacements in Year 1 must be capitalized under section 5.02 of this revenue procedure.

(j) Example 10. (i) The facts are the same as in

Example 8, except that when the January Year 1

written project authorization is issued, L’s management expects that the work will not be completed

until Year 3. The work commences in Year 1 and

continues in Years 2 and 3. In Year 3, based on a

study of actual deterioration in removed pipe versus

that shown by the inspection device, L’s engineers

determine that the replacement of only nine miles (9

percent) of the 100-mile section is warranted, rather

than the 11 miles (11 percent) originally anticipated.

In December of Year 3, L’s engineers issue the final

work order, authorizing the replacement of two additional miles of pipe, and the work is completed. In

aggregate, only nine total miles of pipe are replaced

under the written project authorization.

(ii) For purposes of determining whether the

replacement costs are capitalized under section 5.02

of this revenue procedure, the replacement work

expected to be performed in Year 1, Year 2, and Year

3 is aggregated pursuant to the January Year 1 project authorization, which meets the requirements of

sections 5.06(1) and (2) of this revenue procedure.

Because the replacement of more than 10 percent

of the unit of property was authorized in January of

Year 1, the costs of the replacements that are incurred

in Year 1 and Year 2 are capitalized. Under section

5.06(5) of this revenue procedure, the aggregation

determination is based on the status of the written

project authorization and the work done, or to be

done, as of the close of each taxable year, and modifications do not affect the aggregation of replacements

in prior taxable years. Therefore, the fact that only a

total of nine miles (nine percent of the 100-mile unit

of property) was eventually replaced does not affect

the tax treatment of the replacement costs incurred

in Year 1 and Year 2. However, the costs incurred in

Year 3 are not required to be capitalized because, at

the end of Year 3, L knows that only nine percent of

the unit of property was replaced under the Year 1

project authorization.

(k) Example 11. (i) The facts are the same as in

Example 10, except that pursuant to L’s initial survey, the January Year 1 written project authorization

requires the replacement of only nine miles of pipe

(nine percent of the 100-mile unit of property). Eight

miles are replaced in Years 1 and 2. In Year 3, L’s

engineers determine that five additional miles of

pipe should be replaced for a total of 13 miles and

request that management modify the project and

authorize additional funds to complete the 13-mile

replacement. The project authorization is modified

Bulletin No. 2023–18

accordingly, and replacement of the remaining five

miles is completed by December of Year 3.

(ii) For purposes of determining whether the

replacement costs are capitalized under section 5.02

of this revenue procedure, the costs of the replacements expected to be performed in Years 1 through

3 were aggregated under this section 5.06 pursuant

to the Year 1 project authorization, which meets

the requirements of sections 5.06(1) and (2). Under

section 5.06(5) of this revenue procedure, the aggregation determination was based on the status of the

written project authorization and the work done, or

to be done, as of the close of each taxable year, and

modifications would not affect the aggregation of

replacements in prior taxable years. Accordingly, the

costs incurred in Years 1 and 2 are not required to be

capitalized because, as of the end of each of those

taxable years, the total replacements required by the

project authorization were not expected to exceed 10

percent of the unit of property. Pursuant to section

5.06(5) of this revenue procedure, however, the cost

of the five miles replaced in Year 3 is required to be

capitalized, because, as of the end of Year 3, it was

known that a total of 13 miles (13 percent of the unit

of property) were replaced pursuant to the Year 1

project authorization.

.07 Safe harbor method for linear

property – rules for distribution service

line costs.

(1) In general. A taxpayer using the

safe harbor method for linear property

must determine the amount of distribution

service line costs that must be capitalized using the rules described in sections

5.07(2) and 5.07(3) of this revenue procedure. The rules in section 5.07(2) of this

revenue procedure determine the treatment of distribution service line costs that

a taxpayer can identify with reasonable

accuracy as paid or incurred for a project described in section 5.07(2) of this

revenue procedure. The rules in section

5.07(3) of this revenue procedure determine the treatment of distribution service

line costs that the taxpayer is unable to

identify with reasonable accuracy as paid

or incurred for a project described in section 5.07(2) of this revenue procedure.

(2) Rules for identified distribution

service line costs. To the extent that a

taxpayer can identify, with reasonable

accuracy, distribution service line costs,

the following treatment applies to the

identified costs:

(a) Identified costs that are per se capital expenditures. Identified distribution

service line costs that are per se capital

expenditures described under section

5.05 of this revenue procedure, including

distribution service line costs associated

with distribution main costs that are per

Bulletin No. 2023–18

se capital expenditures described under

section 5.05 of this revenue procedure, are

required to be capitalized.

(b) Identified costs other than per se

capital expenditures.

(i) Identified distribution service line

costs, other than per se capital expenditures described in section 5.07(2)(a) of

this revenue procedure, associated with

distribution main replacements that are

required to be capitalized under section

5.03(2) of this revenue procedure (that is,

associated with distribution main replacements that are more than four miles), are

required to be capitalized;

(ii) Identified distribution service line

costs, other than per se capital expenditures described in section 5.07(2)(a) of

this revenue procedure, associated with

distribution main replacements that are

not required to be capitalized under section 5.03(2) of this revenue procedure

(that is, associated with distribution main

replacements that are four miles or less),

are not required to be capitalized; and

(iii) Identified distribution service line

costs, other than per se capital expenditures described in section 5.07(2)(a) of

this revenue procedure, not associated

with distribution main replacements (for

example, the replacement of a customer’s

service line only) are not required to be

capitalized.

(3) Simplified rules for unidentified distribution service line costs. To the extent a

taxpayer cannot identify distribution service line costs with reasonable accuracy

as provided under section 5.07(2) of this

revenue procedure, the simplified rules

in this section 5.07(3) apply to determine

the amount of such costs to be capitalized under §§ 263(a) and 263A. Step 1

determines the total amount of unidentified distribution service line costs. Steps

2 through 4 determine the capitalization

ratio that applies to such costs. In Step 5,

the taxpayer multiplies the total amount of

unidentified distribution line costs determined in Step 1 by the capitalization ratio

to determine the amount of its unidentified distribution service line costs that are

required to be capitalized.

(a) Step 1. Determine total unidentified

distribution service line costs. To determine the total unidentified distribution

service line costs, the taxpayer’s total distribution service line costs for the taxable

817

year are reduced by the identified distribution service line costs described in section

5.07(2) of this revenue procedure.

(b) Step 2. Determine total distribution main replacement costs not

associated with identified distribution

service line costs (denominator of capitalization ratio). To determine the total

distribution main replacement costs not

associated with identified distribution

service line costs for purposes of the

denominator in the capitalization ratio, the

taxpayer’s total distribution main replacement costs, including distribution main

replacement costs qualifying under the de

minimis rule for blanket orders under section 5.03(3)(b) of this revenue procedure,

paid or incurred in the taxable year are

decreased by the following:

(i) Distribution main replacement costs

that are required to be capitalized as per se

capital expenditures under section 5.05 of

this revenue procedure;

(ii) Distribution main replacement

costs associated with identified distribution service line costs required to be

capitalized under section 5.07(2)(b)(i) of

this revenue procedure; and

(iii) Distribution main replacement

costs associated with identified distribution service line costs not required to be

capitalized under section 5.07(2)(b)(ii) of

this revenue procedure.

(c) Step 3. Determine capitalized

distribution main replacement costs

not associated with identified distribution service line costs (numerator of

capitalization ratio). To determine the

capitalized distribution main replacement

costs not associated with identified distribution service line costs for purposes of

the numerator in the capitalization ratio,

the taxpayer’s total costs of distribution

main replacements that are required to

be capitalized under section 5.03(2) of

this revenue procedure are decreased by

any amount of distribution main replacement costs associated with identified

distribution service line costs required to

be capitalized under section 5.07(2)(b)

(i) of this revenue procedure (the amount

determined in section 5.07(3)(b)(ii) of this

revenue procedure).

(d) Step 4. Determine capitalization

ratio. To determine the capitalization

ratio, divide the taxpayer’s capitalized

distribution main replacement costs not

May 1, 2023

associated with identified distribution service line costs that were capitalized, as

determined under Step 3, by the taxpayer’s

total distribution main replacement costs

not associated with distribution service

line costs, as determined under Step 2.

(e) Step 5. Determine the portion of

unidentified distribution service line costs

that must be capitalized. To determine the

portion of unidentified distribution service

line costs that must be capitalized, multiply the taxpayer’s capitalization ratio, as

determined under Step 4, by the taxpayer’s total unidentified distribution service

line costs determined under Step 1.

(f) Formula. The following formula

reflects the rule provided in this section

5.07(3):

Total

unidentified

distribution service

line costs (Step 1)

Capitalized distribution main

replacement costs not associated with

identified distribution service line costs (Step 3)

----------------------------------------------------Total distribution main replacement

costs not associated with identified distribution

service line costs

(Step 2)

Capitalized

unidentified

distribution

service line

costs (Step 5)

×

[

(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

May 1, 2023

Capitalization ratio (Step 4)

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)

818

]

=

$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

Bulletin No. 2023–18

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 transition 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

Bulletin No. 2023–18

§ 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 service 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 service 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, second, or third taxable years with a § 481(a)

adjustment. If a taxpayer changes to the

NGSH Method for the taxpayer’s first,

819

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 subsequent 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

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 election. 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

May 1, 2023

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) adjustment—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-

820

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,

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

Bulletin No. 2023–18

§ 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

821

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 allowance 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

May 1, 2023

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.

SECTION 6. CHANGE IN METHOD

OF ACCOUNTING

.01 In general. A change to the safe

harbor method for linear property and/

or a change to the safe harbor method

for non-linear property under this revenue procedure is a change in method of

accounting to which the provisions of

§§ 446 and 481, and the corresponding

regulations, apply. However, section 6.04

of this revenue procedure allows certain

taxpayers to choose to change to these

methods of accounting on a cut-off basis.

A taxpayer that wants to change to the

methods of accounting described in this

revenue procedure must, if eligible, use

the automatic change procedures in Rev.

Proc. 2015-13, 2015-5 I.R.B. 419, as clarified and modified by Rev. Proc. 2015-33,

2015-24 I.R.B. 1067, and as modified by

Rev. Proc. 2021-34, 2021-35 I.R.B. 337,

by Rev. Proc. 2021-26, 2021-22 I.R.B.

1163, by Rev. Proc. 2017-59, 2017-48

I.R.B. 543, and by section 17.02(b) and

(c) of Rev. Proc. 2016-1, 2016-1 I.R.B. 1.

.02 Statistical sampling. A taxpayer

changing to the NGSH Method may use

statistical sampling in determining the

§ 481(a) adjustment amount attributable

to any single taxable year by following the

guidance provided in Rev. Proc. 2011-42.

.03 Extrapolation. A taxpayer changing

to the NGSH Method may use the extrapolation methodology provided in Appendix

B of this revenue procedure (Appendix B)

in determining the § 481(a) adjustment

amount, if the taxpayer is within the scope

of section 1.02 of Appendix B. Extrapolation methodologies not permitted in

Appendix B are not permitted under the

NGSH Method.

.04 Optional cut-off basis for first 3

taxable years.

(1) Availability of change on a cutoff basis. A taxpayer that changes to the

May 1, 2023

safe harbor method for linear property

for the taxpayer’s first, second, or third

taxable year ending after May 1, 2023,

may choose to change to this method of

accounting on a cut-off basis. See section

2.07 of Rev. Proc. 2015-13. A taxpayer

that chooses to change to the safe harbor

method for linear property on a cut-off

basis under this section 6.04, and also

changes to the safe harbor method for

non-linear property for the taxpayer’s first,

second, or third taxable year ending after

May 1, 2023, also must change to the safe

harbor method for non-linear property on

a cut-off basis, regardless of the year of

this change. A taxpayer that changes to the

safe harbor method for linear property for

the taxpayer’s first, second, or third taxable year ending after May 1, 2013, and

does not make this change on a cut-off

basis is not permitted to change to the safe

harbor method for non-linear property on

a cut-off basis.

(2) Effect of change on a cut-off basis.

A taxpayer that chooses to change to the

NGSH Method on a cut-off basis is not

eligible to use the NGSH Method rules

under sections 5.02, 5.03, 5.04, 5.05, 5.06,

and 5.07 of this revenue procedure for any

linear property costs and non-linear property costs paid or incurred prior to the year

of change, but must make the late general

asset account election for the property

described in section 5.08(2)(a)(ii) of this

revenue procedure. A § 481(a) adjustment

is neither required nor permitted for the

change to the NGSH Method on a cut-off

basis. Further, a taxpayer that chooses to

make this change on a cut-off basis under

this section 6.04 does not receive audit

protection under section 8.01 of Rev. Proc.

2015-13 in connection with this change.

See section 8.02(2) of Rev. Proc 2015-13.

.05 Automatic change. Rev. Proc.

2022-14 is modified to add new section

3.12, to read as follows:

3.12 Natural gas transmission and distribution property method of accounting

under Rev. Proc. 2023-15.

(1) Description of change.

(a) Applicability. This change applies

to a taxpayer that is within the scope of

Rev. Proc. 2023-15 and wants to change

its treatment of natural gas transmission

and distribution property costs to use the

natural gas transmission and distribution

property safe harbor method of account-

822

ing (NGSH Method) described in Rev.

Proc. 2023-15. Specifically, this change

applies to a taxpayer that wants to change

to “the safe harbor method for linear

property” or “the safe harbor method for

non-linear property” and other applicable rules in accordance with Rev. Proc.

2023-15, including the making of a late

general asset account election as required

under section 5.08(2) of Rev. Proc. 202315. This change also applies to a taxpayer

that previously changed to the safe harbor method for linear property and wants

to change to the safe harbor method for

non-linear property for a subsequent taxable year.

(b) Inapplicability. This change does

not apply to the making of a late general

asset account election other than in accordance with section 5.08(2) of Rev. Proc.

2023-15.

(2) Certain eligibility rules temporarily

inapplicable.

(a) In general. The eligibility rules in

section 5.01(1)(d) and (f) of Rev. Proc.

2015-13 do not apply to a taxpayer that

changes to the NGSH Method provided

in Rev. Proc. 2023-15 for its first, second,

or third taxable year ending after May 1,

2023.

(b) Concurrent automatic change.

(i) If a taxpayer makes both a change

under this section 3.12 and a change under

section 6.12(3)(b) and/or section 6.15 of

this revenue procedure for linear property

and/or non-linear property for its first,

second, or third taxable year ending after

May 1, 2023, on a single Form 3115 for

the same asset for the same year of change

in accordance with section 3.12(6)(b)

of this revenue procedure, the eligibility

rules in section 5.01(1)(d) and (f) of Rev.

Proc. 2015-13 do not apply to the taxpayer

for these changes.

(ii) If a taxpayer makes both a change

under this section 3.12 and a change under

section 11.08, 12.01, 12.02, 12.08, and/or

12.12 of this revenue procedure, as applicable, for its linear property or non-linear

property costs in its first, second, or third

taxable year ending after May 1, 2023, on

a single Form 3115 for the same year of

change in accordance with section 3.12(6)

of this revenue procedure, the eligibility

rules in section 5.01(1)(d) and (f) of Rev.

Proc. 2015-13 do not apply to the taxpayer

for these changes.

Bulletin No. 2023–18

(3) Manner of making change.

(a) Late general asset account election.

(i) The late general asset account election change described in section 5.08(2)

of Rev. Proc. 2023-15 is made using a

modified cut-off method under which

the unadjusted depreciable basis and

the depreciation reserve of the asset as

of the beginning of the year of change

are accounted for using the proposed

method of accounting. The late general

asset account election change requires

each general asset account to include a

beginning balance for both the unadjusted

depreciable basis and the depreciation

reserve. The beginning balance for the

unadjusted depreciable basis of each general asset account is equal to the sum of

the unadjusted depreciable basis as of

the beginning of the year of change for

all assets included in that general asset

account. The beginning balance of the

depreciation reserve of each general asset

account is equal to the sum of the greater

of the depreciation allowed or allowable

as of the beginning of the year of change

for all assets included in that general asset

account.

(ii) For the late general asset account

election change described in section

5.08(2) of Rev. Proc. 2023-15, the taxpayer must attach to its Form 3115 a

statement providing that the taxpayer

agrees to the following additional terms

and conditions:

(A) The taxpayer consents to, and

agrees to apply, all the provisions of

§ 1.168(i)-1 to the assets that are subject

to the election specified in section 5.08(2)

of Rev. Proc. 2023-15; and

(B)

Except

as

provided

in

§ 1.168(i)-1(c)(1)(ii)(A), (e)(3), (g), or (h),

the election made by the taxpayer under

section 5.08(2) of Rev. Proc. 2023-15 is

irrevocable and will be binding on the taxpayer for computing taxable income for

the year of change and for all subsequent

taxable years with respect to the assets

that are subject to this election.

(b) Cut-off basis for certain changes.

Except for changes to make a late general

asset account election described in section

3.12(3)(a) of this revenue procedure, a

change to the NGSH Method described in

Rev. Proc. 2023-15 is made on a cut-off

basis and applies only to natural gas transmission and distribution property costs

Bulletin No. 2023–18

paid or incurred beginning in or after the

year of change if–

(i) Sections 5.08(2)(a)(ii) and 6.04 of

Rev. Proc. 2023-15 apply (the taxpayer

changes to the NGSH Method described

in Rev. Proc. 2023-15 for the first, second,

or third taxable year ending after May 1,

2023, on a cut-off basis); or

(ii) Section 5.08(2)(a)(iii) of Rev. Proc.

2023-15 applies (the taxpayer changes to

the NGSH Method described in Rev. Proc.

2023-15 for the fourth taxable year ending

after May 1, 2023, or for any subsequent

taxable year).

(4) Section 481(a) adjustment.

(a) In general. Except as provided in

section 3.12(3)(b) of this revenue procedure, a taxpayer changing its methods of

accounting under this section 3.12 must

take the entire net § 481(a) adjustment

into account, whether positive or negative, in computing taxable income for the

year of change in the manner provided in

section 7.03 of Rev. Proc. 2015-13. The

entire net § 481(a) adjustment includes all

aspects of the NGSH Method described in

Rev. Proc. 2023-15, including a change

to the methods of accounting permitted

under § 1.168(i)-1 pursuant to section

5.08(2) of Rev. Proc. 2023-15. However,

a § 481(a) adjustment is neither required

nor permitted for the late general asset

account election described in section

5.08(2) of Rev. Proc. 2023-15. Further,

a § 481(a) adjustment is neither required

nor permitted if the taxpayer chooses to

change to the NGSH Method on a cutoff basis under section 6.04 of Rev. Proc.

2023-15 or if the taxpayer changes to this

method during the time described in section 5.08(2)(a)(iii) of Rev. Proc. 2023-15.

(b) Repair allowance property. A taxpayer changing its method of accounting

under this section 3.12 must not include

in the § 481(a) adjustment any amount

attributable to property for which the

taxpayer elected to apply the repair allowance under § 1.167(a)-11(d)(2) for any

taxable year in which the repair allowance

election was made.

(c) Statistical sampling. A taxpayer

changing to the NGSH Method under this

section 3.12 may use statistical sampling

in determining the § 481(a) adjustment

amount attributable to any single taxable

year by following the guidance provided

in Rev. Proc. 2011-42, 2011-37 I.R.B. 318.

823

(d) Extrapolation. A taxpayer changing

to the NGSH Method under this section

3.12 may use the extrapolation methodology provided in Appendix B to Rev. Proc.

2023-15 (Appendix B) in determining the

§ 481(a) adjustment amount if the taxpayer is within the scope of section 1.02

of Appendix B. Extrapolation methodologies not permitted in Appendix B are not

permitted under the NGSH Method.

(5) No audit protection for certain taxpayers. If a taxpayer chooses to change

to the NGSH Method described in Rev.

Proc. 2023-15 on a cut-off basis as permitted under section 6.04 of Rev. Proc.

2023-15 or is required to change on a cutoff basis under section 5.08(3)(b)(i) of

Rev. Proc. 2023-15, the taxpayer does not

receive audit protection under section 8.01

of Rev. Proc. 2015-13 in connection with

this change.

(6) Concurrent automatic changes.

(a) A taxpayer making changes under

this section 3.12 for more than one asset

for the same year of change must file a

single Form 3115 for all such assets. The

single Form 3115 must provide a single net § 481(a) adjustment for all such

changes.

(b) A taxpayer making changes under

this section 3.12 and changes under section 6.12(3)(b) and/or section 6.15 of this

revenue procedure for linear property or

non-linear property costs for the same

year of change must file a single Form

3115 for all changes and must enter the

designated automatic accounting method

change numbers for all changes on the

appropriate line on the Form 3115. See

section 6.03(1)(b) of Rev. Proc. 2015-13

for information on making concurrent

changes.

(c) A taxpayer making changes under

this section 3.12 and also making a coordinating change to its linear property or

non-linear property costs under section

11.08, 12.01, 12.02, 12.08, and/or 12.12

of this revenue procedure, as applicable,

must file a single Form 3115 for the same

year of change for all these changes, provided that the taxpayer is not prohibited

from filing an automatic change under

the eligibility rules under section 5 of

Rev. Proc. 2015-13. For changes required

to be filed on a single Form 3115 under

this section, the taxpayer must enter the

designated automatic accounting method

May 1, 2023

change numbers for all changes on the

appropriate line on the Form 3115. See

section 6.03(1)(b) of Rev. Proc. 2015-13

for information on making concurrent

changes.

(d) A taxpayer that changes to a method

of accounting under this section 3.12 for

taxable years ending after the third taxable year ending after May 1, 2023 and

is also required to change its method of

accounting to properly capitalize its linear property or non-linear property costs

under § 263(a) and/or § 263A under section 5.08(3)(b)(ii) of Rev. Proc. 2023-15,

must file a single Form 3115 for the same

year of change for all these changes, provided that the taxpayer is not prohibited

from filing an automatic change under the

eligibility rules set out in section 5 of Rev.

Proc. 2015-13, 2015-5 I.R.B. 419. For

changes required to be filed on a single

Form 3115 under this paragraph, the taxpayer must enter the designated automatic

accounting method change numbers for

all changes on the appropriate line on the

Form 3115. See section 6.03(1)(b) of Rev.

Proc. 2015-13 for information on making

concurrent changes.

(7) Examples. The following examples

illustrate this section 3.12. In each example, it is assumed that the taxpayer (a) is

a C corporation, on an accrual method of

accounting and using a calendar taxable

year, (b) is within the scope of Rev. Proc.

2023-15, (c) placed in service natural

gas transmission property or distribution property that is described in section

4 of Rev. Proc. 2023-15 and is MACRS

property, (d) 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,

(e) is changing its methods of accounting

for both linear property and non-linear

property under the NGSH Method for the

same taxable year, and (f) is not changing to the NGSH Method on a cut-off

basis under section 6.04 of Rev. Proc.

2023-15. Unless otherwise stated, it

also is assumed that (a) the cost of the

replacements before Year 1 were not

capitalized under § 263(a), (b) the cost

of the replacements before Year 1 would

not have been capitalized if the taxpayer

used the NGSH Method provided under

May 1, 2023

sections 5.02, 5.03, 5.04, 5.06, and 5.07

of Rev. Proc. 2023-15 for such prior taxable years, and (c) the taxpayer’s natural

gas transmission and distribution property expenditures are not per se capital

expenditures under section 5.05(1)(a)-(f),

(i), or (j) of Rev. Proc. 2023-15. 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. 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.

(a) Example 1. (i) X is a local natural gas distribution company. Before Year 1, X owned and placed

in service natural gas distribution property at a cost

of $120 million before any dispositions or additions.

Before Year 1, X 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, X recognized

losses upon the dispositions of that $10 million of

property, capitalized $12 million for the cost of the

replacements of that property under § 263(a), and

deducted depreciation of $800,000 on such $12 million. X files a Form 3115 with its Federal income tax

return for Year 1 to change its methods of accounting to use the NGSH Method described in Rev. Proc.

2023-15.

(ii) Because Year 1 is X’s first taxable year ending after May 1, 2023, section 5.08(2)(a)(i) and (3)

(a) of Rev. Proc. 2023-15 apply. Pursuant to section

5.08(3)(a) of Rev. Proc. 2023-15, the per se capital

expenditure rules in section 5.05(1)(g) and (h) of

Rev. Proc. 2023-15 do not apply to the replacement

cost of $12 million that X capitalized under § 263(a)

on its Federal income tax returns before Year 1.

Accordingly, this $12 million cost of the replacements is not treated as a per se capital expenditure

under the NGSH Method. Therefore, at the beginning of Year 1, X is treated under Rev. Proc. 2023-15

as owning natural gas distribution property at a cost

of $110 million ($120 million - $10 million). Under

section 5.08(2)(a)(i) of Rev. Proc. 2023-15, X mus

This text is long and has been trimmed here. Open the source document for the complete record.