1. American Gas Association Repairs Technical Update June 29, 2010

2. Presentation titlePage 2 Repairs – Status of Forthcoming Regulations ►Proposed Regulations under Section 263(a) ►Delayed until late 2010 ►Frequent technical meetings by regulation drafters continuing ►Mix of final, proposed and temporary regulations ►Many issues still under consideration, including unit of property, “betterments”, “restorations”, and repair allowance, for example ►Possibly no section 481(a) adjustment

3. Presentation titlePage 3 Repairs – Technical Update ►Rev. Proc. 2009-39 ►Accounting method change for repair and maintenance costs automatic (new Appendix section 3.06) ►Accounting method change for dispositions of structural components of buildings under Section 168 automatic (new Appendix section 6.24); also, Appendix section 6.25 contains similar change procedure for tangible personal property and land improvements. Both provisions are for taxpayers that desire “to change to a unit of property that is permissible” for determining when a disposition of such unit has occurred. ►No audit protection on the unit of property in this context ►Expanded definition of “under examination” to include refund under review by Joint Committee on Taxation (new section 3.08(5))

4. Presentation titlePage 4 Repairs – Tier 1 Status ►How and why repairs became a Tier 1 issue ►Issuance of Proposed regulations in 2006 ►Hundreds of Form 3115 filings to expense previously capitalized repair costs, many with significant adjustments ►May 2009 IRS LMSB emerging issue alert ►Capitalization issues will continue to be a prevalent theme both in in the context of repairs and depreciation for the foreseeable future

5. Presentation titlePage 5 Repairs – Tier I Status ►Two IRS Director Directives issued in January, 2010 ►First Directive ►Outlines procedures for examining the issue and involvement of industry technical advisors and specialists ►Requires examiners to address unit of property determinations for all industries ►Focus on remodel and renovation issues in gaming, retail and restaurant industries

6. Presentation titlePage 6 Repairs – Tier I Status ►Second Directive ►Examiners not prohibited from examining re-characterization once automatic or advance consent effective for method change ►Examiners may challenge factual representations – including unit of property determinations ►IRS may attempt to challenge taxpayers on unit of property issues even if a ruling letter has been issued stating the unit(s) of property

7. Presentation titlePage 7 Tier I Implications ►On exam, IRS has consistently been unwilling or unable to resolve unit of property issues in many cases (e.g., even in the context of routine building repairs) ►As a result, the IRS has resolved cases on other grounds ►By agreeing to accept certain categories of repairs or ►Accepting an agreed upon percentage of the adjustment Result: Uncertainty in some cases as to the new method

8. Presentation titlePage 8 Tier I Implications ►IRS has encouraged taxpayers to pursue pre-filing agreements and seek formalized industry issue resolution ►Examination experiences including “CAP” taxpayers

9. Presentation titlePage 9 Repair IDR’s ►Issues raised by the IRS on examination: ►Unit of property (including identification of a “major component or substantial structural part”) ►Difficulty in distinguishing between depreciable costs and repairs in the context of a cost segregation study; desire to modify prior IRS directives regarding cost segregation ►Material increase in value ►Appreciably prolonging useful life ►New or different use ►Plan of rehabilitation

10. Presentation titlePage 10 Retirements ►Treasury appears likely to address retirements as part of the final 263(a) tangible property regulations package; ►Guidance will entail interpretation of sections 168 and 165 ►CCA 201016054 (12/9/2009) : “…what is the asset (the unit of property or “UOP”) for depreciation and retirement purposes may not be the same as the UOP for repair capitalization purposes.