AMERICAN GAS ASSOCIATION

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AMERICAN GAS ASSOCIATION INTERSTATE NATURAL GAS
ASSOCIATION

• Update on Selected Cases and Rulings
• Craig King Tony Nissley
• June 27, 2006

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Update on Selected Court Cases and
RulingsUniform Capitalization

• Revenue Procedure 2006-11
• For first taxable year ending on or after August
  2, 2005
• Taxpayers may utilize advance consent procedures
  of
• Revenue Procedure 97-27 or
• Automatic consent procedures of Revenue Procedure
  2002-9.
• Applies to any taxpayer seeking to change method
  of accounting for mixed service costs to comply
  with Regulations section 1.263A-1T and 1.263A-2T/

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Update on Selected Court Cases and
RulingsUniform Capitalization

• Technical Advice Memorandum 200609018, March 3,
  2006.
• Ruled Engineering department is a service
  department that to some extent incurs mixed
  service costs. To extent costs of engineering
  department include costs of labor that can be
  identified with particular units or groups of
  units of specific produced property, such costs
  are direct labor costs.
• Ruled Procurement department costs are mixed
  service costs.

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Update on Selected Court Cases and
RulingsUniform Capitalization

• Technical Advice Memorandum 200613033, March 31,
  2006.
• Ruled To the extent a department is a mixed
  service department, all service costs of the
  department must be included in determining total
  mixed service costs for purposes of the SSCM.
• Capitalizable service costs
• Deductible service costs and
• Mixed service costs.

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Update on Selected Court Cases and
RulingsUniform Capitalization

• Technical Advice Memorandum 200543050, October
  28, 2005
• Ruled Some transmission and distribution costs
  are handling costs that must be capitalized.
• Rationale Taxpayer is required to change the
  form or nature of electricity by changing its
  voltage to meet delivery requirements of
  customers. Stepping down voltage readies the
  electricity for sale and is either processing or
  assembly.
• Wheeling costs, however, would be distribution
  costs.

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Update on Selected Court Cases and
RulingsUniform Capitalization

• Anschutz Company v. Commissioner, TC Memo
  2006-40, March 13, 2006
• Held Two levels of allocation for indirect
  costs.
• Level One Taxpayer must make a reasonable
  allocation between production, resale and other
  activities.
• For this purpose, reasonable allocation must have
  a logic to it and a sound basis and
  justification for it.
• Level Two If indirect costs must be allocated
  among items of property subject to section 263A,
  taxpayer may use certain specified methods or
  any other reasonable method.
• Regulations section 1.263A-1(f)(4) specified what
  is necessary to be reasonable for Level Two, not
  Level One.

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Update on Selected Court Cases and
RulingsUniform Capitalization

• Current Events
• IRS Commissioner testified before Senate Finance
  Committee on routine and repetitive issue.
• June 13, 2006
• Taxpayer positions on routine and repetitive
  were often flawed.
• IMT currently examining 62 claims that pre-date
  August 2005 Regulations.
• IMT is partnering with other IRS functions and
  external stakeholders to develop resolution
  strategy under Revenue Ruling 2005-53.
• No additional guidance deemed necessary.

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Update on Selected Court Cases and
RulingsUniform Capitalization

• Issues Going Forward
• IRS Interviews of MSC Departments.
• Implications of TD costs being handling costs,
  rather than distribution costs.
• Implications for allocation of additional section
  263A costs to gas inventories.

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Update on Selected Court Cases and
RulingsCapitalization of Intangibles

• Revenue Procedure 2006-12, 2006-3 IRB 1, December
  21, 2005
• Exclusive administrative procedure for taxpayers
  to obtain automatic consent to change to method
  of accounting provided in final regulations on
  capitalizing costs for intangibles.
• For taxable year ending on or after December 31,
  2005 and
• For any earlier taxable year that is after the
  taxpayers second taxable year ending on or after
  December 31, 2003.

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Update on Selected Court Cases and
RulingsSection 197 Intangibles

• Technical Advice Memorandum 200614001 (September
  25, 2005)
• Ruled Power supply contracts and power purchase
  contracts acquired by a purchaser were excluded
  from definition of section 197 intangible.
• Rationale
• Excluded as an interest under an existing
  futures contract, notional principal contract,
  or other similar financial contract.
• Electricity is a commodity electricity supplied
  could come from any source, not just a specific
  output facility and contracts required purchase
  and sale of specified amount of electricity for a
  specified price within a specified period.

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Update on Selected Court Cases and
RulingsDomestic Manufacturing Deduction

• Revenue Procedure 2006-22, May 26, 2006
• Provides methods for calculating W-2 wages for
  purposes of the section 199 limitation to 50
  percent of W-2 wages
• Applies to taxpayers who choose to apply final
  regulations to taxable years beginning before
  June 1, 2006, but only for taxable years
  beginning on or after January 1, 2005 and on or
  before May 17, 2006.
• Methods like those in Proposed Regulations.

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Update on Selected Court Cases and RulingsBonus
Depreciation

• Announcement 2006-29, 2006-19 IRB 1, April 19,
  2006
• Extended placed-in-service date through December
  31, 2006 for longer production period property
  eligible for extended placed-in-service date of
  December 31, 2005.
• Extends placed-in-service date to December 31,
  2006 that is either placed in service by the
  taxpayer or manufactured by a person in the GO
  Zone, the Rita GO zone, or the Wilma GO Zone,
  provided the taxpayer was unable to meet the
  December 31, 2005 placed-in-service date as a
  result of Hurricane Katrina, Rita, or Wilma.

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Update on Selected Court Cases and
RulingsQualifying Gasification and Advanced Coal
Projects

• Notice 2006-24, Notice 2006-25, 2006-11 IRB 1,
  March 13, 2006
• Notice 2006-24 establishes qualifying advanced
  coal project program under Code section 48A
  credit.
• Notice 2006-25 establishes qualifying
  gasification project program under Code section
  48B credit.
• Notices set forth requirements for DOE
  certification and for application to IRS for
  section 48A or 48B certification.

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Update on Selected Court Cases and
RulingsSection 45 Credit

• Notice of Inflation Adjustment Factor, March 31,
  2006
• Publication of inflation adjustment factor and
  reference price for 2006 under section 45
• Reference prices cause no phaseout of credit.
• Credit for 2006 adjusted for inflation is
• 1.9 cents per kilowatt hour for
• Wind, closed-loop biomass, geothermal, and solar.
• 0.9 cents per kilowatt hour for
• Open-loop biomass, small irrigation power,
  landfill gas, trash combustion, and hydropower
• 5,679 per ton on sale of qualified refined coal.

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Update on Selected Court Cases and
RulingsSection 45 Credit

• Private Letter Ruling 200609001, 200609002, March
  3, 2006
• Ruled Allocation of section 45 credits to
  partners that were proportionate to valid
  allocations of gross income arising from receipts
  from sale of electricity from wind turbines to
  unrelated persons during the taxable year were in
  accordance with partners interests in
  partnership.
• Ruled Technical termination of partnership under
  section 708(b)(1)(B) will not preclude
  reconstituted partnership from taking section 45
  credits for production and sale of electricity
  from wind turbines to unrelated persons during
  the taxable year.

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Update on Selected Court Cases and
RulingsSection 29 Credit

• Notice 2006-37, IRB 2006-18 (May 1, 2006)
• Credit for 2005 is 6.79
• Inflation Adjustment Factor 2.2640
• Reference Price 50.26
• No phase out for 2005 credit, because reference
  price did not exceed 23.50 per barrel times
  inflation adjustment factor.
• Risk Phase out for 2006 if current oil prices
  continue.

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Update on Selected Court Cases and
RulingsSection 29 Credit

• Private Letter Ruling 200550026, September 6,
  2005
• Ruled Replacement of facility parts and
  relocation of facility does not result in new
  placed-in-service date, provided that fair market
  value of property used at the original facility
  continues to be more than 20 percent of the
  total fair market value immediately following
  relocation and replacement taking into account
  cost of new equipment plus value of property used
  in original facility.
• Prior ruling not disturbed.

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Update on Selected Court Cases and
RulingsSection 29 Credit

• Private Letter Rulings 200617009, 200617010,
  January 19, 2006
• Ruled For purposes of determining whether fair
  market value of property used at original
  facility is more than 20 percent of the
  facilitys total fair market value immediately
  following replacement or relocation, the
  facility consists of process equipment directly
  necessary for production of qualified fuel,
  starting at the immediate input of the coal and
  chemical reagents to pug mills through output
  from briquetters.
• Facility does not include costs of purchase and
  installation of equipment that support operation
  but is not directly necessary for production of
  qualified fuel such as coal beneficiation or
  preparation equipment (crushers, screens, scales
  etc) or material handling or conveying equipment,
  buildings, and other administrative assets.
• Prior rulings confirmed.

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Update on Selected Court Cases and
RulingsSection 29 Credit

• Private Letter Rulings 200615020, December 29,
  2005
• Ruled Sale of membership interest in partnership
  did not affect validity of prior rulings that
• Synthetic fuel produced was qualified fuel
• Production from the facility will be attributable
  solely to the partnership
• Section 29 credit may be allocated to taxpayer
  based on valid allocation of receipts from sale
  of qualified fuel
• Relocation of facility or replacement of part of
  facility will not result in new placed-in-service
  date, provided fair market value of original
  property is more than 20 percent of the
  facilitys total fair market value at the time of
  the relocation or replacement.

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Update on Selected Court Cases and
RulingsSection 29 Credit

• Private Letter Rulings 200621019, February 1,
  2006
• Ruled Facility was placed in service before July
  1, 1998.
• IRS analyzed five factors
• All licenses and permits necessary for operation
  had been secured
• Control of facility had passed to former owner
• All critical tests had be completed
• Daily or regular operation had commenced and
• Former owner was in a trade or business.

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Update on Selected Court Cases and
RulingsContributions in Aid of Construction

• Private Letter Ruling 200552002, September 28,
  2005
• Ruled Transfer of intertie by county to utility
  met the safe harbor requirements of Notice 88-129
  as amended and modified by Notice 90-60 and
  Notice 2001-82, and qualified as a
  non-shareholder contribution to capital under
  section 118(a).
• Electricity was wheeled by X over utilitys grid.
• County not purchasing electricity from utility
  for project.
• Ownership of electricity wheeled transferred to
  customer prior to transmission on utilitys grid.
• Inflow of power to project projected to be less
  than 5 percent.
• Chicago, Burlington, Quincy RR factors met
  through taxpayer representations

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Update on Selected Court Cases and RulingsMA

• Tax Increase Prevention and Reconciliation Act of
  2006
• Modifies section 355 rules to permit transactions
  like the proposed Time Warner swap of the Atlanta
  Braves for Liberty Medias Time Warner shares.
• Time Warner to transfer Braves (FMV 460 M) and
  cash (about 1.38B) to Newco
• Time Warner to transfer all of Newco shares to
  Liberty Media in exchange for about 63 of
  Liberty Medias 4 stock ownership in Time Warner
  (FMV 1.84B)
• Will be tax free under new law.

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Update on Selected Court Cases and RulingsMA

• Technical Advice Memorandum 200548022, January
  25, 2006
• Ruled Change in treating costs as start-up costs
  under section 195 to ordinary and necessary
  business expenses under section 162 constituted a
  change in method of accounting.
• Ruled Targets investigatory costs do not meet
  the definition of start-up expenditures under
  section 195, because they were not incurred in
  connection with targets creation or acquisition
  of an active trade or business.
• Ruled Taxpayer cannot use next day rule of
  Regulations section 1.1502-76(b)(1)(ii)(B) to
  deduct targets transaction costs on its return
  (versus on targets final tax return).
• IRS had not previously addressed any of the
  issues this TAM addressed.

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Update on Selected Court Cases and
RulingsQualified Research Expenses

• Coordinated Issue Paper Whether Amounts for
  Utilities in Buildings where Qualified Research
  is Conducted are Qualified Research Expenses
  under Section 41.
• Conclusion Section 41 presumes utility expenses
  are general and administrative expenses not
  included in credit computation, unless taxpayer
  can establish special character of qualified
  research required additional extraordinary
  expenditures for utilities.
• Presumption that incremental costs of providing
  utilities in research buildings over
  corresponding costs in non-research buildings did
  not discharge taxpayers burden of proof.

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Update on Selected Court Cases and
RulingsNormalization Proposed Regulations

• Proposed Regulations issued December 20, 2005.
• Withdrew 2003 controversial proposal.
• EDFIT
• Continued rule of 2003 proposal for deregulated
  generation assets
• Extended application to all public utility
  property.
• ADITC
• Flow through cannot continue after deregulation
  except to extent utility is permitted to recover
  stranded costs after deregulation.
• Applicable to all public utility property.
• Effective for property deregulated after December
  21, 2005.
• Property deregulated prior to that date are
  subject to historic IRS position set forth in its
  private letter rulings.

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Update on Selected Court Cases and Rulings

• QA