Q&A Re: Tangible Property Regs. Small Taxpayer Safe Harbor Election

Can we confirm whether the tangible property regs’ Small Taxpayer Safe Harbor election mentions anywhere whether, for purposes of the gross receipts test, one must consider “controlled group” or attribution rules under section 318?

This is a good question. (To clarify the Small Taxpayer Safe Harbor is an annual election for businesses with $10 million in gross receipts ((avg of 3 years)) and buildings with an adjusted basis of $1 million or less) I think the hope was that the regulations would provide the general rules and administrative guidance would be issued to clean up these types of practical issues.

The regulations reference the term “taxpayer,” but they don't provide a definition of the term “taxpayer” or address consolidated groups. These concepts are addressed in the administrative guidance that explains how to make the necessary method changes pursuant to the regulations, however.

You will recall that the IRS has issued a series of Rev. Procs. for automatic consents for the temp regs and now the final regs (and there is at least one more Rev. Proc. forthcoming). They build on each other. Rev. Proc. 2014-16 modified parts of Rev. Proc. 2012-19 and Rev. Proc. 2012-19 modified parts of 2011-14. So if you look back at Section 3.03 of Rev. Proc. 2011-14, it includes the following language:

  • In general. The term “taxpayer” has the same meaning as the term “person” defined in § 7701(a)(1) (rather than the meaning of the term “taxpayer” defined in § 7701(a)(14)).
  • Consolidated group. For purposes of the following sections of this revenue procedure, the term “taxpayer” includes a consolidated group: (a) sections 3.08(1), 3.09(1), and 4.02(1) (taxpayer under examination), (b) section 3.09(2) (taxpayer before an appeals office), and (c) section 3.09(3) (taxpayer before a federal court).

This would provide the answer to your question if the small building safe harbor was an accounting method change. I would have to read the rules a little closer, but my first thought is that it really isn't a method change per se and that it is an annual election.

***The purpose of this post is for informational & discussion purposes only and is not intended to be used as tax advice. Answer provided by Kreig Mitchell, ETS Board Member and Tax Attorney.

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