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SECTION 1. PURPOSE
This revenue procedure provides a safe harbor method of accounting for the cost of original and replacement tires for certain vehicles (original tire capitalization method) used in various business activities. This revenue procedure also explains how a taxpayer can obtain automatic consent from the Commissioner of Internal Revenue to change to the original tire capitalization method, including rules relating to the limitations, terms, and conditions the Commissioner deems necessary to make the change. In addition, this revenue procedure provides an optional procedure for a taxpayer to settle open taxable years using the original tire capitalization method if the taxpayer's treatment of original and replacement tire expenditures is an issue under consideration in examination, before an area appeals office, or before the United States Tax Court (Tax Court) or is an issue pending in examination.
SECTION 2. BACKGROUND
.01 Section 162 of the Internal Revenue Code allows a deduction for all ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business. However, (sec) 263(a) prohibits a deduction for capital expenditures. Capital expenditures include the cost of acquisition, construction, or erection of buildings, machinery and equipment, furniture and fixtures, and similar property having a useful life substantially beyond the taxable year. Section 1.263(a)-2(a) of the Income Tax Regulations. These capital expenditures are subject to the allowance for depreciation.
.02 Section 167(a) provides a depreciation allowance for the exhaustion, wear and tear of property used in a trade or business or held for the production of income. The depreciation deduction provided by (sec) 167(a) for tangible property placed in service after 1986 generally is determined under (sec) 168. This section prescribes two methods of accounting for determining depreciation allowances: (1) the general depreciation system (GDS) in (sec) 168(a); and (2) the alternative depreciation system (ADS) in (sec) 168(g). Under either depreciation system, the depreciation deduction is computed by using a prescribed depreciation method, recovery period, and convention. For purposes of either GDS or ADS, the applicable recovery period is determined by reference to class life or by statute.
Rev. Proc. 87-56 (1987-2 C.B. 674) sets forth the class lives of property that are necessary to compute the depreciation allowances under (sec) 168. The revenue procedure...