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GM Comments on Forthcoming Regs on Tangible Property Costs

FEB. 23, 2004

GM Comments on Forthcoming Regs on Tangible Property Costs

DATED FEB. 23, 2004
DOCUMENT ATTRIBUTES
  • Institutional Authors
    General Motors Corporation
  • Cross-Reference
    For a summary of Notice 2004-6, 2004-3 IRB 308, see Tax Notes,

    Jan. 5, 2004, p. 74; for the full text, see Doc 2003-26934 [PDF] (5

    original pages), 2003 TNT 246-6 Database 'Tax Notes Today 2003', View '(Number', or H&D, Dec. 23, 2003, p.

    3075.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2004-5391 (4 original pages)
  • Tax Analysts Electronic Citation
    2004 TNT 53-30
February 23, 2004

 

Internal Revenue Service

 

Attn: CC:PA:LDP:PR (Notice 2004-6)

 

Room 5203

 

P.O. Box 7604

 

Ben Franklin Station

 

Washington, DC 20044

 

 

Dear Sir or Madam:

[1] In Notice 2004-6, the Treasury Department and the Internal Revenue Service announce their intent to propose regulations that clarify the application of I.R.C. §§ 162 and 263 for expenses incurred to repair, improve or rehabilitate tangible property. The notice identifies specific issues that may be addressed in the regulations. General Motors Corporation appreciates the opportunity to offer the following comments on question number 12, "Should the regulations provide a de minimis rule?"

[2] We respectfully recommend that the regulations establish a safe harbor permitting taxpayers to deduct the cost of "nominal value assets" to the extent such purchases are expensed for financial accounting purposes. Such a safe harbor provides bright line rules, resolves rather than raises issues, reduces controversy and lessens burdens on both IRS and taxpayer resources.

Background: The Cost of US Tax Compliance is Too High

[3] The expense of preparing tax returns is huge and growing; the burden of explaining and defending those returns is unpredictable and increasingly contentious; the cost of settling tax disputes is often prohibitive in view of the rules for accumulating interest on tax deficiencies. Tax administration in the US costs too much and is anti-competitive in comparison with the rest of the world. There are numerous reasons why our tax system is more costly and less predictable -- complexity being one of them; and there are many reasons for this complexity.

[4] The purpose of this letter is not to comment on complexity, per se, or on the broad and much needed simplification movement, other than to compliment the IRS and Treasury on their recent initiatives to make the Code more administrable and the result more certain. The purpose of this letter is to point out and promote just one measure which, if adopted, would go a long-way towards adding certainty and administrability to the tax system -- simplifying life for both the IRS and corporate taxpayers.

Guiding Principles for Safe Harbors

[5] One way in which certainty and administrability can be achieved is through the use of "safe harbors". We suggest the following guiding principles be used in developing safe harbors.

[6] Simplicity -- guidance should provide a method that reduces, not increases, complexity and uncertainty for taxpayer compliance and for IRS audit review. Fairness -- a flat-dollar threshold (say, $2,000) or industry-based thresholds should generally be avoided as being overly generous and administratively convenient for some taxpayers and overly restrictive or inconvenient for others. Practicality -- guidance should be based on how business is actually conducted and should not add another layer of record-keeping for tax purposes only. Voluntary -- guidance should provide a voluntary "safe harbor". Taxpayers who prefer to continue to use their existing minimum capitalization threshold or who have reached working agreements with their IRS audit teams should not be required to change.

Nominal Value Assets: Certain Things are Just Not Worth Keeping Track Of

[7] Many assets used in trade or business are never recorded in the taxpayer's financial accounting records. Businesses regularly purchase and use various supplies, tools and other pieces of equipment or furnishings that are generally small, numerous and/or difficult to track. Such items are typically characterized by a low- dollar value and/or a short useful life. These so-called "nominal value" assets are expensed upon acquisition for financial accounting purposes because the business people have determined they have a de minimus value that does not justify the administrative cost and effort of tracking them. Therefore, these assets are not given identification numbers, their location or continued use is not recorded or monitored, and they are not recorded as assets in the company's books or in asset record systems. Sometimes a business may have different dollar-value thresholds based on the business unit or the type of equipment involved; from time-to-time a business will raise the dollar-value threshold of what it views as "nominal value". Assets exceeding the nominal value thresholds established by the business people are capitalized and depreciated for financial accounting purposes.

[8] There is a natural tension, particularly for publicly traded companies, between increasing the nominal value threshold to maximize administrative convenience and limiting or reducing the threshold to increase financial statement income and to maintain asset management and control. Minimum capitalization standards are subject to a variety of independent reviews. Most companies undergo independent audits of their financial accounts, including minimum capitalization standards. Many are also subject to other outside regulatory restrictions, such as the Department of Defense, plus external reporting and/or audits under SEC, banking, insurance and other regulatory bodies that impose limits on the company's minimum capitalization threshold.

[9] Taxpayers have sometimes followed their financial accounting treatment of nominal value assets for tax purposes. This practice has been met with inconsistent treatment by IRS Field Agents as they struggle to determine the appropriate approach. Some Agents have rejected any deduction of such items and require the taxpayer to capitalize and depreciate them. Other Agents have permitted the financial accounting treatment for tax purposes. Still others have attempted to impose a flat-dollar threshold (e.g., $2,000) determined by local IRS management.

Proposal: A Nominal Value Asset Safe Harbor Rule

[10] We recommend a safe harbor rule permitting taxpayers to deduct the cost of nominal value purchases. Under the safe harbor, taxpayers would be allowed to rely on the same business determination of what constitutes "nominal" that is used for financial accounting purposes. The method of accounting would be to expense "nominal" value purchases, as that term is defined for financial statement purposes. Although one or more flat-dollar amounts would likely be specified, those amounts themselves would not be the method of accounting, only the current definition of "nominal". In preparing the tax return, there would be no need to make a "book-to-tax" adjustment (i.e., no schedule M-1 adjustment) because book and tax would be the same.

Advantages and Discussion: An Idea Whose Time Has Come

[11] There are numerous advantages to this approach. First and foremost is the reduced burden on taxpayers because no book-to-tax adjustment or parallel record-keeping is required for tax purposes. Taxpayers would simply follow books and only have to retain records already being retained for ordinary business purposes. Likewise, there is a reduced burden on IRS resources as it would eliminate time spent requesting and then reviewing support for low-value, recurring purchases, which, in the end, have merely a timing effect. Importantly, the approach creates compliance certainty through avoidance of extended negotiation in each and every audit cycle as to an appropriate capitalization threshold. It is also fair in that financial accounting thresholds are developed by the taxpayer's bookkeepers based on the size and nature of the business, not a one- size fits-all standard.

[12] It seems to us that following a standard that is also used for financial accounting purposes offers a common sense approach that meets the thrust and intent of the "clear reflection of income" standard. Most nominal value assets are short-lived items acquired on a regular and recurring basis in the ordinary course of business. Further, the reduced burden on taxpayers tracking and retaining supporting documentation for nominal value assets and on IRS audit teams reviewing the issue every audit cycle would far outweigh any academic purity scholars might so admire or any actual additional tax revenue generated by imposing post-return timing adjustments for these low-value purchases.

[13] Many taxpayers and IRS audit teams are informally following some sort of minimum capitalization standard, but often using a negotiated flat-dollar threshold rather than a consistent, predictable standard that allows taxpayers to be in compliance at the time the return is filed. Providing guidance to explicitly support a simple workable rule would provide certainty and assurance to taxpayers and IRS audit teams alike. It also would eliminate the inconsistent treatment and results that currently exist and reduce administrative burdens for both the IRS and taxpayers.

Conclusion:

[14] A de minimus safe harbor for nominal value assets based on the taxpayer financial accounting standards meets the goals set out in Notice 2004-6: bright lines, resolving rather than raising issues, reducing controversy and burden on both IRS and taxpayer. Moreover, it is in keeping with the spirit of the final regulations issued on December 22, 2003 that included a de minimus rule for intangible assets. It is clearly an idea whose time has come.

[15] We appreciate the IRS' and Treasury's willingness to consider providing taxpayers and IRS personnel with workable guidance on minimum capitalization. Adopting a simple safe harbor rule allowing tax return treatment of minimum capitalization items to follow the same nominal value asset standard used for financial accounting would make tax compliance easier, more certain, and would reduce taxpayer and IRS resources on audits. If you have any questions regarding this recommendation, please let me know at 313- 665-4080 or roger.d.wheeler@gm.com.

Respectfully submitted,

 

 

Roger D. Wheeler

 

Chief Tax Officer

 

General Motors Corporation

 

Detroit, MI

 

Cc:

 

The Honorable Gregory F. Jenner, Acting Asst. Secretary (Tax

 

Policy)

 

The Honorable Mark W. Everson, Commissioner, IRS

 

The Honorable Emily A. Parker, Acting Chief Counsel, IRS
DOCUMENT ATTRIBUTES
  • Institutional Authors
    General Motors Corporation
  • Cross-Reference
    For a summary of Notice 2004-6, 2004-3 IRB 308, see Tax Notes,

    Jan. 5, 2004, p. 74; for the full text, see Doc 2003-26934 [PDF] (5

    original pages), 2003 TNT 246-6 Database 'Tax Notes Today 2003', View '(Number', or H&D, Dec. 23, 2003, p.

    3075.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2004-5391 (4 original pages)
  • Tax Analysts Electronic Citation
    2004 TNT 53-30
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