On Jan.13, the IRS released a Technical Advice Memorandum (TAM 201001018) that will be of interest to clients owning vessels that support offshore oil and gas operations. In the TAM, the IRS concedes that the taxpayer may use a five-year life, rather than a 10-year life, for purposes of depreciating its vessels.
A TAM addresses a particular taxpayer's case and may not be relied on by other taxpayers. Nevertheless, a taxpayer who takes the same position as that of the taxpayer in the TAM can expect that upon audit an IRS examiner will be unlikely to attack a position that has been approved by the IRS National Office for another taxpayer.
At issue in the TAM was whether the vessels fell within asset Class 00.28 "Vessels, Barges, Tugs and Similar Water Transportation" or asset Class 13.0 "Offshore Drilling." The former class is assigned a class life of ten years, whereas the latter class is assigned a class life of five years. A previous IRS ruling had suggested that use of the shorter life depended on evidence that the vessel was used exclusively to support drilling activities.
Under the facts of the TAM, the taxpayer leased support vessels to companies engaged in offshore oil and gas exploration, development and production. The lessees used the vessels to transport the lessees' supplies, equipment and personnel in all phases of the lessees' operations. The taxpayer kept no records that would provide evidence of the use of the vessels for drilling support as opposed to support of other operations. This meant that, if the shorter class life were available only to vessels used exclusively to support drilling, the taxpayer could not support its position.
The TAM concludes that the shorter life is available for support vessels whether or not they are used exclusively in support of drilling. The TAM reaches this conclusion by noting that the asset-class description refers to assets used in offshore operations not just offshore drilling, even though the asset class is labeled "Offshore Drilling." Based on a review of the history behind prior iterations of Class 13 and other classes describing similar assets, the IRS concluded that Class 13 was intended to include support vessels used in any offshore oil and gas operations.
Although the taxpayer in the TAM was a lessor of vessels, the TAM should apply to all owners of such vessels. The TAM refers to its interpretation applying to such vessels "whether used for the taxpayer's own account or for others," suggesting that not only lessors but any owner of such support vessels may wish to reconsider the class life it assigns the vessels.
For questions about the content of this alert, please contact Gardere Tax Partner Michael J. Donohue ([email protected] or 214.999.4231).
IRS CIRCULAR 230 DISCLOSURE:
This communication has not been prepared as a formal legal opinion within the procedures described in Treasury Department Circular 230. As a result, we are required by Treasury Regulations to advise you that for any significant Federal tax issue addressed herein, the advice in this communication (including any attachments) was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.
