In Uncategorized on 06/05/2018 at 15:23

The Cannon Corporation and Subsidiaries, Docket No. 12466-26, filed 6/5/18, claim they just want to change their method of accounting via Section 481(a), to load up six (count ‘em, six) years’ worth of heavy-duty deductions for energy-saving equipment into one year.  Cannon never installed that equipment in any property Cannon owned or leased. And Cannon claims Rev. Proc. 2011-14, 2011-4 I.R.B. 330 lets Cannon (and the subs) do it, because IRS never got around to promulgating the regs Congress told them to.

IRS wants partial summary J saying “no can do.” Cannon claims IRS speaks with forked Proc., and wants barrelsful of IRS documents showing said Rev. Proc. means what Cannon says it means.

Once again, Congress’ unguided tax largesse makes trouble. Old Section 179D gave an immediate write-off for installing energy-efficient stuff. But when it came to exempts, like State and municipal facilities that pay no income tax, the largesse vanished. Instead of saying “them’s the breaks,” Congress allowed the exempts to give the write-off to the designers of said stuff. And IRS “shall” make regs telling them how to do it.

Ya think IRS made regs? Roger that.

So Cannon wound up with about $6 million in write-offs for the six years. For one open year, Cannon files an 1120X, so that’s off the table. But for the rest, Cannon gets inventive.

And who better to deal with inventive taxpayers than one whom the Wall Street Journal, in its June 1, 2018 issue, calls “a jurist known for his quirky writings,” Judge Mark V (“Quirky”) Holmes? Thanks to Mr Richard Rubin of the WSJ, and my colleague Peter Reilly, CPA, for finally giving me the right cognomen for Judge Holmes.

“But for the [V] through [Y] tax years, Cannon did something unusual — it claimed both the deductions for those years and the deduction for its [Z] tax year on its [Z] tax return, which it filed with the IRS…. All these § 179D deductions for the [V]-[Z] tax years were lumped together with “other deductions” on this return. While it reported the §179D deduction for the [Z] tax year like any other deduction, it separately identified its [V]-[Y] deductions as I.R.C. § 481(a) adjustments on a Form 3115, Application for Change in Accounting Method, that it attached to the return.” Order, at p. 3.

Accounting method changes are designed to prevent duplication or omission of items. An accounting change is either an overall change (like cash to accrual) or a material item change (a change in a material item used in the overall plan for the tax years in question). The big question in a material item change is timing: not whether an item is deductible, but when?

Well, isn’t that what Cannon (and the subs) are fighting about? Well, yes, but there’s more.

“And an item involves timing only if its tax treatment accelerates deduction or postpones income, but not if its tax treatment permanently distorts the taxpayer’s lifetime taxable income.” Order, at p. 6. (Citations omitted, but check them out.)

And here it does. Cannon is not like a non-exempt owner that took the one-year Section 179D deduction. The non-exempt has to reduce basis dollar for dollar with the one-year deduction, so at disposition or annually, decreased basis means either greater gain or smaller depreciation deductions. Cannon (and the subs) has no basis to reduce.

Judge Holmes has to parse the language of the Rev. Proc., but finds its doesn’t change timing, only requires that a certification be filed where the exempt is giving the designer the write-off the exempt can’t itself use.

No need for barrelsful of documents. No change in method. Partial summary J to IRS.

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