rp-11-43.pdf

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Part III

Administrative, Procedural, and Miscellaneous

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

Rev. Proc. 2011-43

SECTION 1. PURPOSE
This revenue procedure provides a safe harbor method of accounting that
taxpayers may use to determine whether expenditures to maintain, replace, or improve
electric transmission and distribution property must be capitalized under § 263(a) of the
Internal Revenue Code. This revenue procedure also provides procedures for obtaining
automatic consent to change to the safe harbor method of accounting.
SECTION 2. BACKGROUND
.01 Taxpayers that transmit and distribute electricity incur significant
expenditures to maintain, replace, and improve transmission and distribution property.
Whether these expenditures are deductible as repairs under § 162 or must be
capitalized as improvements under § 263(a) depends on whether the expenditures

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materially increase the value of the property or substantially prolong its useful life. See

§ 1.162-4 of the Income Tax Regulations. Applying capitalization principles to electric
transmission and distribution property can be particularly difficult, largely because the
property consists of a network of interconnected items such as poles, conductor, and
transformers. Taxpayers and the Internal Revenue Service often do not agree on which
items within this network constitute discrete units of property and whether the
replacement of a particular item materially increases the value or substantially prolongs
the useful life of a unit of property.
.02 To minimize disputes regarding the deductibility or capitalization of
expenditures to maintain, replace, or improve transmission and distribution property,
this revenue procedure provides a “transmission and distribution property safe harbor
method of accounting” for determining the amount of expenditures required to be
capitalized under § 263(a). This revenue procedure classifies transmission and
distribution property as either linear property (for example, conductor, poles) or non-
linear property (for example, transformers, customer electric meters). For linear
property, this revenue procedure defines the appropriate units of property and provides
a simplified method of determining when the cost of replacing a portion of a unit of linear
property must be capitalized. For non-linear property, this revenue procedure defines
the appropriate units of property but does not provide a simplified method of
determining when the cost of replacing a portion of a unit of non-linear property must be
capitalized. Taxpayers must follow the principles of § 263(a) to determine whether the
replacement of a portion of a non-linear unit of property is deductible or capitalizable.

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This revenue procedure also identifies certain expenditures that are per se treated as
capital expenditures.
.03 A taxpayer’s method for determining whether an expenditure is deductible or
is capitalizable is a method of accounting under § 446. Section 446(e) and § 1.446-1(c)
require taxpayers to secure the consent of the 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 3. SCOPE
This revenue procedure applies to a taxpayer that--
(1) has a depreciable interest in electric transmission or distribution property (as
described in section 4 of this revenue procedure) used primarily to transport, deliver, or
sell electricity; and
(2) applies the transmission and distribution property safe harbor method of
accounting provided in this revenue procedure to all of its electric transmission and
distribution property as defined in this revenue procedure. The determination of
whether a taxpayer is within the scope of this revenue procedure is made by each
member of a consolidated group, by a partnership, or by an S corporation.
SECTION 4. DEFINITIONS
The following definitions apply solely for purposes of this revenue procedure:
.01 Linear property
. “Linear property” means all electric transmission and
distribution property except non-linear property.

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.02 Non-linear property
. “Non-linear property” means all electric transmission
and distribution property that is substation property, storage battery property, line
transformers, customer electric meters (including smart electric meters), or property
installed on a customer’s premises.
.03 Electric transmission and distribution property
. “Electric transmission and
distribution property” means real and personal property that is used to conduct and
control electricity at any point between an electric generating station and the location of
consumption of the electricity by the customer. The electric generating station is not
included in this definition. Examples include wires (conductor), towers, poles, structures
and fittings mounted on towers and poles, electrical interrupters (such as circuit
breakers, fuses, and other switches), transformers, capacitors, instrumentation, security
structures, and pads on which equipment is mounted. In addition and solely for the
purposes of this revenue procedure, electric transmission and distribution property
includes (a) street lighting and (b) traffic and similar signal systems. Electric
transmission and distribution property does not include personal or real property, such
as a corporate office building, not directly used to conduct and control electricity.
.04 Substation property
. “Substation property” means transformers and devices
(such as fuses, breakers, other switches, insulators, fencing, walls, and enclosures or
other structures) that are installed at an electrical substation, i.e., a subsidiary station of
an electricity generation, transmission, and distribution system where voltage is
transformed from high to low, or the reverse, using transformers.

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.05 Storage battery property
. “Storage battery property” means one or more
interconnected batteries and the devices that connect the batteries to other
transmission and distribution property.
.06 Line transformer
. “Line transformer” means the electrical device that causes
an interim or final reduction of the voltage of electricity to the voltage at which the
electricity is delivered to one or more customers. Line transformers are typically located
on a pole when overhead service is provided or in a box or vault when underground
service is provided. A transformer located at a substation is not a line transformer.
.07 Customer electric meter
. “Customer electric meter” means the device that
measures the amount of electricity delivered to a customer. In addition to traditional
electric meters, this term includes smart electric meters, advanced electric meters that
enable two-way communication between the electric meter and the central system for
monitoring and billing purposes.
.08 Property installed on a customer’s premises
. “Property installed on a
customer’s premises” means the devices, such as electrical usage controls on
appliances, which are owned by the taxpayer but installed on property owned by the
taxpayer’s customer (excluding customer electric meters).
.09 Circuit
. “Circuit” means the linear property: (1) between a generating station
and the initial substation; (2) between any two substations; or (3) between the final
substation (the last substation before the line transformer) and the customer’s electric
meter.

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.10 Blanket work order procedure
. “Blanket work order procedure” means a
procedure under which a taxpayer charges multiple replacements over a specific period
of time to a single work order.
SECTION 5. TRANSMISSION AND DISTRIBUTION PROPERTY SAFE HARBOR
METHOD OF ACCOUNTING
.01 In general
. A taxpayer using the transmission and distribution property safe
harbor method provided by this revenue procedure must determine its units of
transmission and distribution property as provided in section 5.02 of this revenue
procedure. For each replacement of a portion of a unit of linear property, the taxpayer
must determine whether more than 10 percent of the unit of linear property is replaced.
If more than 10 percent of the unit of linear property is replaced, the cost of the
replacement must be capitalized. If 10 percent or less of the unit of property is
replaced, the cost of the replacement is not required to be capitalized under § 263(a).
In general, individual replacements within a circuit are not aggregated in determining the
percentage of a unit of linear property replaced. But see section 5.04 of this revenue
procedure for situations where aggregation is required. The safe harbor method
described in this section 5 provides the exclusive means for taxpayers using the
transmission and distribution property safe harbor method to determine whether an
expenditure for linear property is deductible or must be capitalized.
.02 Units of property
.
(1) Units of linear property
. For purposes of this revenue procedure, the “unit of
linear property” is determined on a circuit-by-circuit basis; each circuit contains the
following eight units of linear property:

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(a) All conductor and any associated devices, whether overhead or underground,
used to conduct electricity (not including customer service lines and substation property)
constitute a single unit of linear property.
(b) All towers and poles and all structures and fittings mounted on towers and
poles (“fully-dressed poles”) (not including the line transformers) constitute a single unit
of linear property.
(c) All underground conduit constitutes a single unit of linear property.
(d) All boxes and vaults, and structures and fittings mounted in boxes or vaults
(not including the line transformers) constitute a single unit of linear property.
(e) All the customer service drops (the conductor and any associated devices
running from a utility pole or underground box or vault to a customer’s building or other
premises) constitute a single unit of linear property.
(f) All the street lighting constitutes a single unit of linear property.
(g) All the traffic and similar signal systems constitute a single unit of linear
property.
(h) All the smart grid property (as defined in § 168(i)(19)(B)) not located at a
substation (including access points, relays, and e-bridges, but excluding smart electric
meters) constitutes a single unit of linear property.
(2) Units of non-linear property
. For purposes of this revenue procedure, the
following are the units of property for non-linear property:
(a) Each transformer at a substation constitutes a single unit of non-linear
property.

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(b) All fencing, walls, enclosures, other structures surrounding each substation or
supporting the substation electrical devices (excluding enclosures or buildings suitable
for occupation), and land improvements that are not properly capitalized to land
constitute a single unit of non-linear property.
(c) Each set of installed storage battery property constitutes a single unit of non-
linear property.
(d) All smart grid property, as defined in § 168(i)(19)(B), located at each
substation constitutes a single unit of non-linear property.
(e) All other electrical devices at each substation, such as fuses, breakers, other
switches, regulators, insulators, meters, and the pad on which the equipment is installed
constitute a single unit of non-linear property.
(f) Each line transformer constitutes a single unit of non-linear property.
(g) Each customer electric meter (including each smart electric meter) constitutes
a single unit of non-linear property.
(h) All other property installed on each customer’s premises (i.e., all installations
on a single premises) constitutes a single unit of non-linear property.
.03 Determining the percentage of a unit of linear property replaced
.
(1) In general
. The percentage of a unit of linear property replaced is determined
based on the number of items (or other denominating factor) existing in a unit of
property at the beginning of a taxable year as follows:
(a) For conductor and associated devices used to conduct electricity (not
including customer service lines), the number of feet of conductor replaced is divided by
the number of feet of conductor in the unit of property (for example, if 100 feet of

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conductor is replaced in a circuit that contains 2000 feet of conductor, the percentage of
the conductor replaced is 5 percent [100 / 2000 = .05]).
(b) For poles and towers, the number of poles and towers replaced is divided by
the number of poles and towers in the unit of property.
(c) For underground conduit, the number of feet of conduit replaced is divided by
the number of feet of conduit in the unit of property.
(d) For boxes and vaults, the number of boxes and vaults replaced is divided by
the number of boxes and vaults in the unit of property.
(e) For customer service drops, the number of customer service drops replaced
is divided by the number of customer service drops in the unit of property.
(f) For street lighting, the number of street lights replaced is divided by the
number of street lights in the unit of property.
(g) For traffic and similar signal systems, the number of traffic and similar signals
replaced is divided by the number of traffic and similar signals in the unit of property.
(h) For smart grid property as defined in §168(i)(19)(B), but excluding smart
electric meters as defined in § 168(i)(18)(B), the historical cost of smart grid devices
replaced is divided by the historical cost of the smart grid unit of property.
(2) Per se capital expenditures excluded
. For purposes of determining whether
more than 10 percent of a unit of linear property is replaced, replacements that are
required to be capitalized under section 5.06 of this revenue procedure are excluded
(i.e., per se capital expenditures are not included in either the numerator or the
denominator of the ratio used to determine the percentage of a unit of property
replaced).

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(3) Transition rule
. For the first three taxable years ending on or after December
31, 2010, a taxpayer using the transmission and distribution property safe harbor
method provided by this revenue procedure may determine the percentage of a unit of
linear property replaced on the basis of an average circuit within a county.
.04 Aggregation requirement
.
(1) Aggregation rule. For purposes of determining whether more than 10 percent
of the unit of linear property is replaced, a taxpayer must aggregate multiple
replacements within a circuit if--
(a) the replacements are initiated at the same time;
(b) the replacements are required by the occurrence of a single event; or
(c) a regulatory commission decision authorizes the replacements as part of an
identified program aimed at a specific purpose.
(2) Initiated at the same time
. Specific multiple replacements are initiated at the
same time by any action that provides the final approval for the physical conduct of the
replacements. In general, such final approval includes the issuance of a work order
under the taxpayer’s operating procedures that authorizes workers to perform the
replacements. However, work orders that authorize a replacement before the need for
the replacement is identified by the taxpayer, such as a blanket work order, do not
constitute final approval for the physical conduct of the replacement.
.05 Special rules for blanket work orders
.
(1) Allocation of costs among circuits
. A taxpayer that uses a blanket work order
procedure may use the following simplifying assumptions for purposes of determining
whether more than 10 percent of the unit of linear property in a circuit is replaced:

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(a) A taxpayer that replaces property in multiple circuits and charges the
replacements to a single blanket work order may allocate the replacements among the
multiple circuits either (1) on a pro-rata basis (equally among the circuits) or
(2) proportionately based on the length of each circuit.
(b) A taxpayer whose blanket work order procedure uses a standard cost
accounting system may determine the number of replacements charged to a blanket
work order by dividing the total cost of replacements charged to the blanket work order
by the applicable standard cost.
(c) A taxpayer whose blanket work order system accumulates the dollars
expended under the blanket work order, but not the quantity of replacements, may
determine the percentage of a unit of linear property replaced by dividing the total dollar
amount charged to the blanket work order for replacements to the linear unit of property
over a fixed period of time by the total replacement cost of the whole unit of linear
property. The fixed period of time used for the calculation cannot exceed one year.
(2) Blanket work order de minimis rule
. A taxpayer that adheres to a policy that
limits per-event charges under a blanket work order procedure to replacements of
property costing $50,000 or less is not required to capitalize the costs of linear property
replacements charged to the blanket work order.
.06 Per se capital expenditures
. The following expenditures must be capitalized,
notwithstanding any other provision of this revenue procedure:
(1) The costs of replacing overhead conductor with underground conductor within
a circuit, regardless of the percentage of conductor in the circuit that is replaced.
(2) The costs of property necessary to add one or more new customers.

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(3) The costs of property that materially increases rated capacity (i) in a unit of
property or (ii) to one or more customers.
(4) The costs of property that extends an existing circuit.
.07 CLADR percentage repair allowance exclusion. An eligible taxpayer that
changes its treatment of transmission and distribution property expenditures to adopt
the safe harbor method described in this revenue procedure may not elect the Class
Life Asset Depreciation Range System (ADR) repair allowance under § 1.167(a)-
11(d)(2) in any taxable year that the taxpayer uses the safe harbor method permitted
under this revenue procedure. In addition, for any taxable year in which the § 1.167(a)-
11(d)(2) repair allowance election was made, the safe harbor method described in
section 5.01 of this revenue procedure may not be applied to change the taxpayer’s
treatment of property to which the taxpayer elected to apply the repair allowance under
§ 1.167(a)-11(d)(2).
.08 Statistical sampling
. By following the sampling procedures provided in Rev.
Proc. 2011-42, taxpayers adopting the safe harbor method of accounting provided in
this revenue procedure may use statistical sampling to determine whether costs to
maintain, replace, and improve transmission and distribution property are deductible as
repairs under § 162 or must be capitalized as improvements under § 263(a). Sampling
methodologies not described in Rev. Proc. 2011-42 are not permitted under the
transmission and distribution property safe harbor method of accounting.
SECTION 6. EXAMPLES
The following examples illustrate the application of this revenue procedure. In
each example, it is assumed that X
, the taxpayer, files its federal income tax return on a

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calendar year basis and uses the transmission and distribution property safe harbor
method of accounting provided by this revenue procedure.
Example 1
. On July 20 of Year 1, X received authorization from its regulatory
commission to replace a number of defective poles in Circuit A
, which consists of 2,000
poles in total. On July 21 of Year 1, X approves the replacement of and replaces three
of the defective poles. On July 22 of Year 1, X approves the replacement of and
replaces two additional defective poles. Although final approval of the July 21 and July
22 replacements occurred on different days, the replacements are aggregated because
the replacement of all five poles was required by a single event, the July 20
authorization. X
’s cost of replacing the five poles is currently deductible because the
replacement of five poles represents 0.25 percent of the poles in Circuit A, which is 10
percent or less of the poles in the circuit.
Example 2
. In addition to the facts provided in Example 1, in response to a
regulatory commission decision rendered in a prior year to replace utility poles with
fungus damage, between November 1 of Year 1 and January 21 of Year 2, X
replaces
500 poles in Circuit A
. X authorized the replacement of the 500 poles through the
issuance of two work orders: one that authorized the replacements made in Year 1 and
another that authorized the replacements made in Year 2. The replacements are
aggregated, however, because the replacement of all 500 poles was required by the
regulatory commission decision. X
’s costs of replacing the 500 poles are capital
expenditures because the replacement of 500 poles represents 25 percent of the poles
in Circuit A, which is more than 10 percent of the poles in the circuit.

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Example 3
. In addition to the facts provided in Examples 1 and 2, during a
routine inspection of Circuit A, X determined that 50 poles were unstable. X replaces
the 50 unstable poles on December 15 of Year 1. The pole replacement project was
authorized by managers on the day the work crews were assigned and the poles were
replaced. X
’s costs of replacing the 50 poles are currently deductible because the
replacement of 50 poles represents 2.5 percent of the poles in the circuit, which is 10
percent or less of the poles in the circuit.
Example 4
. In addition to the facts provided in Examples 1-3, Circuit A contains
five miles (26,400 feet) of overhead conductor. During Year 1, X initiates two separate
projects: one to replace 2,000 feet of overhead conductor with new overhead conductor
and one to replace 150 feet of overhead conductor with underground conductor. X’s
costs of replacing the 2,000 feet of overhead conductor are currently deductible
because the replacement of 2,000 feet of conductor represents 7.6 percent of the
conductor in Circuit A
, which is 10 percent or less of the conductor in Circuit A. X’s
costs of replacing 150 feet of overhead conductor with underground conductor are
capital expenditures because, even though X
replaced less than 0.6 percent of the
conductor in Circuit A
, the costs of replacing overhead conductor with underground
conductor must be capitalized. If these two replacement projects occurred as part of
one single project, the length of replacement conductor required to be capitalized under
section 5.06 of this revenue procedure would be excluded from both the numerator and
the denominator of the ratio used to determine the percentage of conductor replaced in
Circuit A
.

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Example 5
. X uses a blanket work order system under which certain
replacements or additions are charged to blanket work orders. X follows its policy
limiting per event charges to blanket work orders to replacements of linear property
costing $50,000 or less. The cost of linear property replacements charged on these
blanket work orders are accumulated over the full tax year and then are charged to X
’s
accounts. In Year 1, X charges $800,000 of linear property replacements to blanket
work orders. Because X adheres to a policy that limits the per event charges to blanket
work orders to replacements of linear property costing $50,000 or less, X
may deduct
the $800,000 of linear property replacements charged to the blanket work orders in
Year 1.
Example 6. X owns Circuit B, which serves at the outer edge of a growing
residential community. A plat exists for housing development P
, on which construction
has not begun. Circuit B contains 2,000 poles. On March 1 of Year 1, X receives
authorization to extend Circuit B
to serve housing development P. X extends Circuit B
between May and September of Year 1, placing 180 poles into service as part of Circuit
B
. X’s costs of placing 180 poles into service as part of Circuit B are capital
expenditures because, even though X
increased the number of poles in Circuit B by
less than 10 percent, the costs of extending an existing circuit must be capitalized.
SECTION 7. CHANGE IN METHOD OF ACCOUNTING
.01 In general
. A change to the transmission and distribution property safe
harbor method described in this revenue procedure is a change in method of accounting
to which the provisions of §§ 446 and 481, and the regulations thereunder, apply. A
taxpayer that wants to change to the method of accounting described in this revenue

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procedure must use the automatic change in method of accounting provisions in Rev.
Proc. 2011-14, or its successor, as modified by this revenue procedure.
.02 Statistical sampling and extrapolation
. Taxpayers adopting the safe harbor
method of accounting provided in this revenue procedure may use statistical sampling
to determine the § 481(a) adjustment amount attributable to any single taxable year by
following the sampling procedures provided in Rev. Proc. 2011-42. In addition,
taxpayers adopting the safe harbor method of accounting provided in this revenue
procedure may extrapolate results to determine the § 481(a) adjustment amount for
certain years by following the relevant procedures provided in Appendix A to this
revenue procedure. Sampling or extrapolation methodologies not described in Rev.
Proc. 2011-42 or Appendix A to this revenue procedure are not permitted under the safe
harbor method of accounting.
.03 Automatic change
. Rev. Proc. 2011-14 is modified to add new section 3.09
to the APPENDIX, to read as follows:
.09 Method of accounting under Rev. Proc. 2011-43 for taxpayers in the business
of transporting, delivering, or selling electricity.
(1) Description of change
. This change applies to a taxpayer that is within the
scope of Rev. Proc. 2011-43 and wants to change its treatment of transmission and
distribution property expenditures to adopt the method of accounting described in Rev.
Proc. 2011-43.
(2) Waiver of scope limitations
. The scope limitations in section 4.02 of this
revenue procedure do not apply to an electric transmission or distribution company that

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changes to the method of accounting provided in Rev. Proc. 2011-43 for its first or
second taxable year ending after December 30, 2010.
(3) Section 481(a) adjustment
. A taxpayer must take the entire net § 481(a)
adjustment into account (whether positive or negative) in computing taxable income in
the year of change. The § 481(a) adjustment shall not include 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 election was made. For guidance
regarding permissible § 481(a) calculation methodologies, see Rev. Proc. 2011-43,
section 7.02 and Appendix A.
(4) Ogden copy of Form 3115 required in lieu of national office copy
. A taxpayer
changing its method of accounting under section 3.09 of the APPENDIX must file a
signed copy of its completed Form 3115 with the IRS in Ogden, UT, (Ogden copy) in
lieu of filing the national office copy no earlier than the first day of the year of change
and no later than the date the taxpayer files the original Form 3115 with its federal
income tax return for the year of change. See
sections 6.02(3)(a)(ii)(B) (providing the
general rules) and section 6.02(7)(b) (providing the mailing address) of this revenue
procedure.
(5) Designated automatic accounting method change numbers
. The designated
automatic accounting method change number for a change to the method of accounting
provided in Rev. Proc. 2011-43 is “160.”
(6) Contact information. For further information regarding a change under this
section, contact Alan S. Williams at (202) 622-4950 (not a toll free call).

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SECTION 8. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2011-14 is modified to include the accounting method change in this
revenue procedure in section 3 of the Appendix.
SECTION 9. EFFECTIVE DATE
This revenue procedure is effective for taxable years ending on or after
December 31, 2010.
SECTION 10. DRAFTING INFORMATION
The principal author of this revenue procedure is Alan S. Williams of the Office of
Associate Chief Counsel (Income Tax and Accounting). For further information
regarding this revenue procedure contact Alan S. Williams at 202-622-4950 (not a toll
free call).

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APPENDIX A
Sampling and Extrapolation Guidance
SECTION 1. INTRODUCTION
.01 In general. This appendix provides an extrapolation methodology an eligible
taxpayer may use to adopt the safe harbor method of accounting provided by this
revenue procedure.
.02 Statistical sampling
. A taxpayer who either is filing an original return or is
under examination may use statistical sampling and sampling estimates, as provided in
Rev. Proc. 2011-42, as part of the safe harbor method of accounting provided in this
revenue procedure.
.03 Extrapolation
. A taxpayer desiring to change its treatment of transmission
and distribution property expenditures to adopt the safe harbor method of accounting
described in this revenue procedure may use the extrapolation procedures provided in
this Appendix A for purposes of determining the proper § 481(a) adjustment resulting
from properly making a change in method of accounting. The extrapolation
methodology described in this Appendix A provides the exclusive extrapolation
methodology that is permitted under the safe harbor method of accounting provided in
this revenue procedure.
SECTION 2. EXTRAPOLATION METHODOLOGY
.01 In general
. A taxpayer using the safe harbor method of accounting provided
by this revenue procedure may use the extrapolation procedures provided in this
Appendix A for purposes of redetermining, in connection with calculating a § 481(a)

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adjustment, whether costs to maintain, replace, and improve transmission and
distribution property are deductible as repairs under § 162 or must be capitalized as
improvements under § 263(a).
.02 Calculation methodology. In order to determine the amount of the § 481(a)
adjustment for a year in which extrapolation is applied, the following calculation
methodology must be utilized:
(1) First, a repair deduction percentage shall be computed as follows using data
from a minimum of the three most recent taxable years, including the year of change
(“testing period”).
(a) For each taxable year of the testing period, the sum of deductible repair
expenses under the safe harbor method provided in this revenue procedure must be
reduced by the sum of the repair expenses the taxpayer had taken under its method of
accounting prior to application of the safe harbor. The results of this subtraction are
added together into a total sum of additional (or reduced) deductions resulting from the
application of the safe harbor method during the testing period.
(b) The total sum of additional (or reduced) deductions calculated in step (a) is
divided by the sum of all capital additions during the testing period. The resulting ratio
represents the weighted average percentage of capitalized additions that are properly
treated as additional (or reduced) deductible repair expenses (“tentative repair
deduction percentage”). For this purpose, to determine the sum of all capital additions
taxpayers shall use capital additions for financial statement purposes.
(c) Multiply the tentative repair deduction percentage by a haircut percentage for
each taxable year prior to the testing period for which the taxpayer will use

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extrapolation. For each taxable year that extrapolation is used the haircut percentage is
determined by using the formula (1- (0.10*(X
/Y))) where X equals the number of years
the extrapolation year precedes the year of change and Y
equals the total of number of
taxable years in the testing period. The haircut percentage for a taxable year multiplied
by the tentative repair deduction percentage equals the repair deduction percentage for
the taxable year.
(2) Second, a repair deduction amount for each taxable year outside the testing
period (for which extrapolation is being used) shall be calculated by multiplying the
repair deduction percentage for the taxable year by the capital additions for the year
(except property which was subject to the repair allowance under § 1.167(a)-11(d)(2)).
For this purpose, capital additions must include all basis adjustments required by
§ 1011 (including any applicable audit adjustments for the taxable year) except for the
following:
(a) any adjustments that require tax basis to be reduced before depreciation is
computed (e.g., § 179, § 179D, or similar provisions; § 44 and § 46, or similar
provisions), and
(b) adjustments described in § 1016(a)(2) and § 1016(a)(3).
(3) Basis adjustments required by § 1011 include, but are not limited to, the
following:
(a) adjustments resulting from a change in accounting method permitted under
Rev. Proc. 2000-7, 2000-1 C.B. 712, involving the treatment of the costs incurred in
removing retired assets;

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(b) adjustments resulting from a change in the treatment of capitalized amounts
determined under § 263A, including reductions for additional mixed service costs
allocated to inventory and adjustments to account for changes to interest capitalization
amounts;
(c) adjustments arising from casualty loss deductions recognized under § 165;
and
(d) adjustments resulting from research and experimental expenditures deducted
under § 174.
(4) The basis of electric transmission and distribution property calculated after
taking into account the repair deduction basis adjustment and other basis adjustments
under section 2.02(2) above is the basis that should be used to determine the
deductions allowable or income tax credits available that require tax basis to be reduced
before any depreciation is computed (for example, § 179, § 179D, or similar provisions;
§ 44 and § 46; or similar provisions). The net amount for each asset after the reduction
in basis for such deductions and credits is that property’s § 1.168(b)-1(a)(3) unadjusted
depreciable basis, which is the basis before taking into account § 1016(a)(2) and (3)
adjustments.
(5) For each taxable year in which the § 1.167(a)-11(d)(2) repair allowance
election was made, the repair deduction amount determined in section 2.02(2) of this
Appendix A for the taxable year must exclude additional repairs attributable to property
for which the taxpayer elected to apply the § 1.167(a)-11(d)(2) repair allowance. To
determine the amount to exclude from the § 481(a) adjustment, taxpayers must use a
method comparable to the method actually used to allocate qualified repair

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expenditures to repair allowance property for that year. For example, if in applying
§ 1.167(a)-11(d)(2)(b) for the 1997 taxable year a taxpayer determined that 73 percent
of its 1997 qualified repair expenditures were attributable to eligible repair allowance
property, then that same percentage (73%) must be applied to determine the reduction
to the repair deduction amount otherwise calculated under section 2.02(2) of this
Appendix A.
(6) The § 481(a) adjustment must account for any tax credit and depreciation
deduction adjustments in each taxable year resulting from the additional (or reduced)
repair deductions claimed under the safe harbor method provided in this revenue
procedure.
.03 Consecutive year requirement
. Under the extrapolation calculation
methodology, if sufficient data is available to calculate the repair deduction percentage
for more than three years, the taxpayer may use data from such additional years only if
the additional years are consecutive to the testing period and prior to the year of
change.
.04 Representative years required
. The data from the taxable years used to
calculate the repair deduction percentage must be representative of all years included in
the § 481(a) adjustment.
(1) In determining whether the sampled years are representative, a taxpayer
must take into account restructuring transactions including acquisitions and dispositions,
as well as any other events that may have triggered large capital additions.

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(2) If events or transactions create an aberration in a sampled year, then
consideration should be given to expanding the sampled years, expanding the number
of sample items drawn from that year, or removing the year from the sample.
.05 Example. X changes its method of accounting to the transmission and
distribution property safe harbor method of accounting in 2010. X uses the
extrapolation methodology provided in section 2 of this Appendix A to determine the
amount of its § 481(a) adjustment attributable to taxable years 2007 through 2001. X’s
capital additions for financial statement purposes for 2002 are $10,000. In 2002 X

elected to apply the repair allowance under § 1.167(a)-11(d)(2), which applied to 25% of
X’s transmission and distribution property.
Step 1. X calculates its tentative repair deduction percentage using data from
the three consecutive taxable years 2010, 2009, and 2008. Capital additions for
financial statement purposes properly treated as additional deductible repair expenses
resulting from the application of the safe harbor method for 2010, 2009, and 2008 are
$500, $300, and $200, respectively. Capital additions for financial statement purposes
for 2010, 2009, and 2008 are $ 6,000, $3,000, and $1,000, respectively. The tentative
repair deduction percentage is computed as follows:
$1,000/$10,000= 10%
Step 2
. X calculates the haircut percentage for each taxable year that
extrapolation is used using the formula (1 - 0.10 * (X/Y)), where X equals the number of
years the extrapolation year precedes the year of change and Y
equals the total of
number of taxable years in the testing period. The haircut percentage for each taxable
year that extrapolation is used is calculated as follows:

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Taxable Year
Haircut Percentage Calculation
(Step A)
Haircut Percentage Calculation
(Step B)
2007 0.10 * (3/3) = 0.10 1 – 0.10 = 0.90 = 90%
2006 0.10 * (4/3) = 0.133 1 – 0.133 = 0.867 = 86.7%
2005 0.10 * (5/3) = 0.167 1 – 0.167 = 0.833 = 83.3%
2004 0.10 * (6/3) = 0.20 1 – 0.20 = 0.80 = 80%
2003 0.10 * (7/3) = 0.233 1 – 0.233 = 0.767 = 76.7%
2002 0.10 * (8/3) = 0.267 1 – 0.267 = 0.733 = 73.3%
2001 0.10 * (9/3) = 0.30 1 – 0.30 = 0.70 = 70%

Step 3
. X’s repair deduction percentage for 2002 is 7.33%, which is computed
by multiplying the tentative repair deduction percentage (10%) by the haircut
percentage for 2002 (73.3%).
Step 4
. X’s repair deduction amount for 2002 before additional tax adjustments
and exclusion of additional repairs attributable to property for which the taxpayer elected
to apply the § 1.167(a)-(11)(d)(2) repair allowance is $733 ($10,000 * 7.33%).
Step 5
. X determines that tax adjustments reduce the 2002 calculated repair
deduction amount by $33. X
reduces the calculated repair deduction amount for 2002
by $33, resulting in a repair deduction of $700 before excluding repair amounts
attributable to property for which the taxpayer elected to apply the § 1.167(a)-(11)(d)(2)
repair allowance.
Step 6
. X must reduce its repair deduction amount for 2002 to exclude additional
repairs attributable to property for which the taxpayer elected to apply the § 1.167(a)-
11(d)(2) repair allowance. In 2002, X
determined that 25 percent of its 2002 qualified

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repair expenditures were attributable to eligible transmission and distribution property.
Therefore, X
reduces the repair deduction amount for 2002 by 25%. Accordingly, X
reduces the $700 calculated through Step 5 by $175 ($700 X 25%), resulting in a repair
deduction amount for 2002 of $525 ($700 - $175).
Step 7
. To determine its § 481(a) adjustment amount for 2002, X must account
for its decreased depreciation deductions resulting from the additional $525 of
deductible repair expenditures resulting from the application of the safe harbor method.
Assuming that the additional $525 of deductible repair expenditures for 2002 results in a
$300 reduction in depreciation deductions through the year of change, X
’s § 481(a)
adjustment amount attributable to 2002 is negative $225 (-$525 + $300).