Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has ruled that a public utility changes its method of accounting when it changes its treatment of sewer connection fees from nontaxable capital contributions to taxable income. Conversely, a change from treating connection fees from taxable income to nontaxable capital contributions is also a change in accounting method.

  A public utility charged its customers connection fees when it constructed sewer line extensions to their premises. Previously, the utility treated these connection fees as a nontaxable contribution capital (Code Sec. 118) and claimed a zero basis in the extensions. The utility later concluded that the exclusion did not apply and that the fees should be included in income. The fees were included in income and capitalized into the basis of the extensions. Depreciation deductions were then claimed.

  Generally, if a change in the treatment of an item does not permanently affect a taxpayer's lifetime income but does or could change the tax year in which taxable income is reported, the treatment affects timing and is a method of accounting.

  In the present situation, the utility's lifetime taxable income was unaffected by the proposed change since the depreciation deductions claimed over the recovery period of the sewer lines would offset the sewage fees included in income. The timing of taxable income, however, was affected by including all the fees in income in the year of receipt and offsetting taxable income annually through depreciation deductions. Thus, the change was a change in accounting method.

  The IRS nonacquiesced to the holdings on this issue in Saline Sewer Co. , 63 TCM 2832, Dec. 48,168(M), TC Memo. 1992-236 and Florida Progress Corp. , DC Fla., 98-2 USTC ¶50,951, aff'd, per curiam, on an another issue, CA-11 (unpublished opinion), 2001-1 USTC ¶50,362. The courts in these cases concluded that a change from excluding customer connection fees from income to including them in income gave rise to a permanent difference in lifetime income and, therefore, was not a change in method of accounting. The courts erred, according to the IRS, because they did not consider the effect of the depreciation on lifetime income and the timing of taxable income.

Rev. Rul. 2008-30, 2008FED ¶46,458

Other References:

 
Code Sec. 118

  CCH Reference - 2008FED ¶7202.41

  CCH Reference - 2008FED ¶7202.67

 
Code Sec. 446

  CCH Reference - 2008FED ¶20,620.149

 
Code Sec. 481

  CCH Reference - 2008FED ¶22,277.38

  Tax Research Consultant

  CCH Reference - TRC ACCTNG: 21,054

  CCH Reference - TRC CCORP: 3,254.102