Firm Asks IRS to Clarify Rotable Parts Provisions in Repair Regs

Re: Request for Clarification Regarding Optional Method for Rotable or Temporary Spare Parts

Section 1.162-3T(e) of the temporary regulations provides an optional method of accounting for rotable and temporary spare parts. A taxpayer may use the optional method for rotables instead of the general rule under Section 1.162-3T(a)(3) of the temporary regulations.

Under the optional method for rotables, the taxpayer applies the rules in paragraph (e) to each rotable or temporary spare part upon the taxpayer's:

• Initial installation of the part

• Removal of the part

• Repair, maintenance or improvement of the part

• Reinstallation of the part, and

• Disposal of the part.

However, the analysis of the preamble does not appear to be applied in Example 3 or clarified in Example 4 of the temporary regulations.

In Example 3, it is stated that the taxpayer uses the optional method of accounting for all of its rotable and temporary spare parts under Section 1.162-3T(e) of the temporary regulations. In year one, the taxpayer purchases several vehicles and a number of rotable parts. In year two, the taxpayer uses some of the rotable parts to replace worn or damaged parts. Presumably (but not stated in the example) each vehicle is a separate unit of property.

If Example 3 were consistent with the description of the optional method in the preamble, the example would indicate that the fair market value of damaged or worn parts should be included in income and assigned a cost basis equal to the fair market value of the worn or damaged part (if not disposed of), plus the cost to remove and repair the part. Instead, in Example 3, nothing is done with the worn or damaged parts (which would be true if the general rule for rotable or temporary spare parts would be used).

Thus, it is unclear whether the optional method described in paragraph (e) of the temporary regulations is intentionally or unintentionally different from the optional method described in the preamble to the regulations. We believe that paragraph (e) and Example 3 need to be clarified as to how to treat the original part so that the optional method is clear and the Section 481 effect of adopting this method can be properly determined.

In Example 4, the IRS addresses rotable parts acquired as part of a single unit of property and concludes that because the aircraft engines were acquired as part of the aircraft as a single unit of property, the engines are not materials or supplies, nor rotable or temporary spare parts. Example 4 states that the aircraft engines may not be treated as rotable or temporary spare parts after removal of the engines from the aircraft for use in the same or similar aircraft.

Example 4 is silent as to whether the taxpayer is using the general rule or optional method for rotable and temporary spare parts. If in Example 4, the taxpayer used the optional method, the conclusions reached would not be consistent with the description of the optional method in the preamble to the regulations. If the optional method is used would the original aircraft engine become a rotable or temporary spare part subject to paragraph (e)? This example should also be clarified.

We respectfully submit these comments for clarification of the temporary regulations.

If you have any questions, or need further information please contact Ronald A. Kramer of our office at 412-697-5356.