Office of Tax Analysis

U.S. Treasury Department

Washington, D.C. 20220 

Issued: June 1976 

The Effects of the 

Asset Depreciation Range System on 

Depreciation Practices 

Thomas Vasquez 

OTA Paper 1 May 1974 
2 

Pages 

Introduction 3 

1. 

2. 

3. 

4. 

5. 

The History of the Evolution of Depreciation 6 Deductions in the Internal Revenue Code. 

ADR Electors, 10 

Comparison of Depreciation Practices of 16 Electors and Non-Electors. 

Benefits of ADR election. 26 

A Comparison of the Asset Lives and Depreciation 35 

Method Used for Selected Years Since 1954. 

Appendix A--A Description of the 1973 Survey of 

Recent Experience With Tax Depreciation 39 Rules. 

Appendix B--The Questionnaire Used in the 1973 

Survey of Recent Experience With Tax 44 Depreciation Rules, 
3 

Introduction 

The Asset Depreciation Range (ADR) System, adopted under 

regulatory authority June 23, 1971 and codified by passage of the 

Revenue Act of 1971 on December 10, 1971, provided a range of 

asset lives for various classes of assets placed in service after 

December 31, 1970. In effect, this change in law allowed taxpayers to use shorter asset lives without having to justify to them the 

IRS auditors. Although the Treasury Department considered the 

ADR system an improvement in tax depreciation policy, the ADR 

system has been widely criticized, largely because of the revenue 

loss to the government. Consequently, a few words about the 

general nature of depreciation may be in order. 

The depreciation deduction for tax purposes represents that 

portion of an asset which has been used up in producing the output. 

The total return of an asset may be view as consisting of two 

parts. One part of the income from the asset, which is deemed 

a return of capital, is not taxable while the remaining part is 

taxable income. Perhaps the best way to view the reason for the 

deduction is to compare the purchase of equipment with the holding 

of a debt instrument. Suppose that in each case the value of the 

asset is $100. The debt instrument is a loan for $100 and carries 

the requirement that the borrower must repay the loan plus $10 

at the end of one year. Thus, the holder of the debt instrument 

will receive $110 at the end of the year. While the total income 

received is $110, the amount of the taxable income is only $10 

since the remaining $100 is merely a return of the taxpayer's 

original capital. An analogous situation occurs in the purchase 

of equipment, If the same return is demanded and the equipment lasts 
4 

for only one year, the taxapyer will receive $100 during the year from 

the sale of the output of the machine. The question then is how much 

of the $110 is taxable income. Since the machine by definition 

lasts only one year, its value is zero and thus has depreciated 

by $100, Just as in the case of the debt instrument, the taxpayer 

has only $10 of taxable income. 

The critical problem is to determine the loss in value of the 

equipment. The debt instrument at the time of purchase carries 

a definite repayment agreement immutable by other economic factors.-1/ 

Thus, the division between return of capital and taxable income is 

fixed by the repayment terms. Equipment, however, does not enjoy 

the benefit of fixed repayment terms. Instead, the life of the 

asset and the rate of depreciation are determined by largely 

unpredictable circumstances.g’ Unlike the debt instrument, certainty 

about the amount of depreciation occurring in any given period is 

only obtained after the equipment has been retired. Consequently, 

most observers would agree that an adjustment should be made to 

the total return to exclude the return of capital from the tax base, 

but Shere is a substantial controversy over the size of this adjustment. The need for such an adjustment has resulted in the allowance of depreciation deductions for tax purposes. These deductions 

are computed on the basis of an agreed upon asset life, an 

arbitrary method of distributing the deductions over the life of 

the asset, and an estimate of the remaining value of the asset 

at retirement. 

-1/The borrower could default on his payment. In this situation, the 

lender would be allowed a bad debt deduction,

YWhile the physical characteristics of equipment are known, changes

in demand apd general economic conditions cannot be forecast with 

certainty. 
5 

The length of the asset life which defines the period over which 

the total depreciation deductions are taken has generated the most 

attention during the evolution of depreciation deductions. Generally 

the life of an asset is based on the historical experience of 

similar assets. 

The method of distributing the total deductions over the life 

of the asset has received less attention and at present is no more 

than a set of arbitrary mathematical formulas, 

Finally, the remaining value of the asset at the time of 

retirement (salvage value) is determined by historical experience, 

This paper briefly discusses some of the above issues, but the 

main concern 01 it is an analysis of the Asset Depreciation Range 

(ADR) system. In January, 1973, the Treasury Department initiated 

a survey, conducted by the Office of Industrial Economics (OIE), 

to determine the use and effectiveness of the ADR system. This 

paper presents the results of that survey, The paper is divided 

into five sections, The first section traces the historical 

development of the depreciation deduction for tax purposes, The 

second section presents the results of the survey in respect to 

the number of corporations electing ADR, the amount of investment 

covered under ADR and the distribution of electors by asset size 

and by industry, The third section compares the depreciation 

practices of electors and non-electors. The uses of the various 

tax depreciation methods and asset lives for the two groups are 

compared. The fourth section examines the benefits of electing 

ADR and attempts to determine why a company did or did not elect. 

The final section shows the depreciation methods and asset lives 

used by taxpayers in selected years during the 1954-1971 period. 
6 

Section 1 

The History of the Evolution of Depreciation Deductions 

in the Internal Revenue Code 

Depreciation allowances in the Internal Revenue Code are 

intended to provide ''a reasonable allowance for the exhaustion, 

wear and tear" of assets used in the production of income. 

Since the inception of the Federal income tax, however, much 

controversy has arisen over the term ftreasonableffand these 

controversies have contributed to the evolution of depreciation 

deductions. 

Five major changes in the code have had dramatic effects 

on depreciation. 

Bulletin F was first issued in 1918. It provided 

general guidelines for taxpayers but most importantly placed 

the burden of proof of "reasonableness" on Revenue Agents, 

Taxpayers were instructed to use a tax depreciation life consistent with their own experience and the procedure suggested the 

use of straight line and unit-of-production methods of depreciation. 

The second major change occurred in 1934. In effect, it 

placed the burden of proof of reasonable depreciation deductions 

on taxpayers rather than on Revenue Agents. T.D. 4422 required 

taxpayers to furnish Revenue Agents any evidence needed to 

substantiate the fact that their depreciation deductions were 

reasonable. 

In 1942, Bulletin F was reissued and provided a list of 

some 5,000 asset lives which served as a guideline to acceptable 

depreciation practices, In spite of the apparent formalization 

of asset lives, however, taxpayers were still advised to use 

their own facts and circumstances in determining their 

depreciation deductions. 
7 

Beginning in 1946, more attention was devoted to the types 

of depreciation methods allowed. The use ofthe 150 percent declining balance method was administratively approved in 1946. More 

importantly, however, the Internal Revenue Code of 1954 

authorized the use of declining balance methods of depreciation 

not to exceed twice the straight line rate, the sum-of-years 

digits method, or any other consistent method which does not 

result in a higher cumulative depreciation deduction during the 

first two-thirds of an asset's useful life which is greater than 

that allowed under the double declining balance method. 

After the revisions to the Internal Revenue Code of 1954, 

attention was again devoted to the asset life question, In 

1962, Revenue Procedure 62-21 revised the asset lives provided 

in Bulletin F. The asset lives authorized under this procedure 

lowered the Bulletin F lives by an average of 40 percent, In 

addition to the lowering of asset lives, the Revenue Procedure 

introduced two new concepts. The first was the ''reserve ratio 

test" which in effect provided evidence as to whether the actual 

replacement policies of a particular firm were consistent with 

the depreciation deductions allowed for tax purposes, The 

second concept, which was later expanded under the Asset Depreciation Range (ADR) system, was an attempt to classify broad asset 

categories, In addition to providing allowable asset lives for 

specific types of assets in particular industries, assets 

used generally in all industries were grouped together. There 

were five such classes which covered office furniture and 

equipment, transportation equipment, land improvements, buildings 

and "subsidiary assets." 
8 

In addition to Revenue Procedure 62-21, a change in the 

treatment of salvage value was also accomplished in 1962. 

Prior to 1962, the estimated salvage value of an asset was not 

subject to depreciation allowances, If it was estimated that 

the remaining value of an asset at the end of its useful life 

was 10 percent of the original cost, only 90 percent of the cost 

of the asset could be depreciated, Section 167Cf) of the Internal 

Revenue Code allowed, however, that any salvage value less than 

10 percent of the original cost could be depreciated. Thus 

if salvage value was estimated at 10 percent, the entire 

cost of the asset would be depreciated and likewise if the 

salvage value was estimated at 15 percent, 95 percent of the 

asset could be depreciated. 

Finally, in 1971, the Asset Depreciation Range (ADR) 

system was introduced: A 20 percent range of allowable asset 

lives was established above and below the lives issued under Revenue 

Procedure 62-21. The selection of an asset life within this 

range insures the taxpayer against audit controversy, A 

detailed description of the system is provided in following 

sections of the paper, 

All the changes indicated above were not intended to affect 

specific areas, rather they were viewed as general changes in 

the treatment of depreciation for tax purposes, However, there 

were a few law changes not mentioned that did extend special 

treatment to specific industries or assets, These changes include 

the 5-year amortization allowed on child care facility costs, 
9 

coal mine safety equipment, on-the-job training facility costs, 

expenditures on pollution control facilities, railroad rolling 

stock and expenditures on the rehabilitation of low income housing. 

To the credit of legislators, these are the only cases where 

depreciation deduction allowances were uaed as an Investment 

incentive device rather than a method to accurately measure 

income for tax purposes. 
Section 2 10 

ADR Electors 

Only about 1.4 percent of U.S. corporations elected the 

ADR system,but these corporations accounted for nearly 60 

percent of the total Section 1245 property (equipment) placed 

in service in 1971. As seen in Table 1, while nearly 75 percent 

of all U.S. corporations had less than $250,000 of assets in 

1971, only 42 percent of the ADR electors were in this category. 

Data in Table 1 also indicate that the percent of companies 

electing ADR increases as the amount of assets increases. The 

election rate increases from 0 percent in the less than 

$50,000 asset class to 63.1 percent in the asset class of $1 

billion or more. 

The small number of companies but relatively large percent 

of total investment covered by ADR elections indicate that the 

set of ADR electors is more heavily concentrated among large 

companies than in the population. Table 2 shows that about 88 

percent of the investment covered by ADR in 1971 was placed in 

service by companies with assets of $1billion or more. 

These companies, which represent less than .05 percent of the 

total U.S. corporations, placed 64 percent of the total investment in Section 1245 property during 1971. 

Table 3 shows the distribution of ADR electors by industry. 

The percent of firms in each industry electing ADR varies from 

less than .05 percent in agriculture to 13 percent in the 

electric, gas and sanitary service industry. In addition to 

agriculture, the mining, trade, finance and insurance and the 

service industries had very low election rates, less than the 

1.4 percent all industry average. 
11 

Table 4 shows that investment covered under ADR is concentrated 

in three industry categories-manufacturing, cormnunication,and electric, 

gas, and sanitary services. These three sect,orsaccount for about 84 

percent of the investment covered under ADR, but only about 66 percent 

of total investment. The large concentration of ADR investment in 

manufacturing results simply from the large amount of investment:in 

manufacturing. In fact, the percent of investment covered by ADR in 

manufacturing (63.8 percent) is very’close to the all industry average 

(59.7 percent). This is not the case in comunication and electric, 

gas and sanitary services where over 90 percent of investment was covered 

under the ADR system. The seven remaining sectors showed a low percent 

of covered investment, ranging from a low of 4.1 percent in agriculture 

to a high of 53.1 percent in transportation. 
. . 

12 

Table 1 

Number of Companies Electing ADR As a Percent 

of Total Population by Asset Size 

. . :ADR electors 

: Percent of : Percent of :as percent of 

Asset size :total companies : total ADR :companies in 

(thousands of dollars): in population : electors : asset class 

'Less than 50 

50-250 

250-500 

500-1,000 

1,000-5,000 

5,000-10,000 

10,000-50,000 

50,000-100,000 

100,000-200,000 

200,000-300,000 

300,000-600,000 

600,000-1,000,000 

More than 1,000,000 

Total 

39.6 0.0 0.0 

35.3 41.9 1.7 I 

10.3 12.8 1.8 

6.2 9.2 2.1 

6.1 17.5 4.1 

1.0 4.8 7.1 

1.1 6.2 7.6 

b2 1.9 16.1 

01 1.6 22.9 

* 1.0 34.5 

* 1.2 40.6 

* a6 33.6 

* 1.4 63.1 

100 .0 1004 0 1.4 

*less than .05 percent 

Office of the Secretary of Treasury January 24, 1974 

Office of Tax Analysis 
13 

Table 2 

1941 Investment in Section 1245 Property and the Amount of 

Investment under ADR by Asset Class as a-Percent of Total Investment 

Asset size 

(thousands of dollars) 

Less than 50 

50-250 

250-500 

500-1,000 

1,000-5,000 

5,000-10,000 

10,000-50,000 

50,000-100,000 

100,000-200,000 

200,000-300,000 

300,000-600,000 

600,000-1,000,000 

More than 1,000,000 

Total 

*Less than .OS percent 

. :. Investment 

1971 : under ADR as 

:. Total investment in: a Percent of 

: Sect, 1245 Property : investment by 

: (percent) : asset class 

* 0 

* * 

* * 

.3 20.0 

10.6 25.7 

3.7 3.8 

10.7 8.0 

2.3 18.8 

i.9 23.1 

It4 30.0 

2.7 36.8 

2.7 42.1 

63.9 82.5 

100.0 59.7 

: Investment 

: under ADR as 

: a percent of 

:total investment 

: under ADR 

0 

* 

* 

* 

4.6 

.2 

1.4 

.7 

.7 

.7 

1.7 

1.9 

R8.7 

100 0 

Office of the Secretary of Treasury January 24, 1974 

Office of Tax Analysis 
14 

Table 3 

Number of Companies Electing ADR As a Percent 

Total Population by Industry Division 

: Percent of total : Percent of 

: companies in : total ADR 

trv DoDulation : electors 

of 

:ADR electors as a 

:percent of companies 

: in the industry 

* 

.5 

3.0 

2.2 

2.3 

1.8 

13.0 

1.1 

.6 

.1 

1.4 

May 3, 1974 

Agriculture 

Mining 

Construct ion 

Manufacturing 

T ran spo rt at ion 

Communicat ion 

Elec., Gas & Sanitary Serv. 

Trade 

Finance & Insurance 

Services 

Total 

1.8 * 

.6 .2 

14.2 31.6 

15.5 25.0 

1.9 3.3 

.5 .7 

.3 2.6 

40.5 33.9 

3.3 1.4 

21.3 1.3 

100.0 100.0 

Office of the Secretary of Treasury

Office of Tax Analysis 
Table 4 

Investment Depreciated Under The ADR System by 

Major Industry Category (1245 Propert; Only)-

1971 

. : Investment under : Investment UZT 

: Industry investment: ADR as a percent : ADR as a percc: 

: as a percent of :of total investment: of industyIndustry : total investment : under ADR investnent 

Agriculture 

Hining 

Construction 

Manufacturing 

Transportation 

Communication 

Elec., Gas & Sanitary Serv. 

Trade 

Finance & Insurance 

Services 

Total 

*Less than .05% 

* 4.1 

2.2 0 09 20.5 

5.3 2.8 31.0 

38.1 40.7 63.8 

6.9 6.1 53.1 

12.5 18.9 90.5 

15.7 24.1 91.8 

10.1 4.4 26.0 

2'. 2 1.0 27.4 

6.2 1.1 10.5 

100.0 100.0 59.7 

Office of the Secretary of Treasury ' January 24, 197k 

Office of Tax Analysis 
16 

Section 3 

Comparison of Depreciation Practices of 

ADR Electors and Non-Electors 

Those firms electing ADR differ in many respects from 

those not electing the system, The first section showed that ADR 

electors are predominantly larger firms, few in number, controlling 

nearly 40 percent of total assets owned by U.S. corporations, and 

accounting for nearly 60 percent of Section 1245 (equipment) investment 

in 1971. In this section the depreciation practices of the two groups 

of companiet are compared. 

Table 5 compares the depreciation method used by electors and nonelectors by industry group. The difference is striking. While only 

2.3 percent of electors use straight-line depreciation, about 43 percent 

of non-electors used this method. Rather than using straight-line 

depreciation, most ilDR electors used the more accelerated methods of 

declining balance at twice the straight-line rate and the sum of years 

digits method. Table 6 shows the percentages of firms using 

the principal depreciation methods by the size of total assets 

of the firm and by elector and non-elector classes, Firm 

size does not appear to affect the choice of depreciation 

methods. With the exception of the less than $250,000 and the 

$500,000 to $1,000,000 asset classes for electors, the use 

of the four methods for electors and non-electors in each 

asset size class does not appreciably differ from the all asset 

size average for electors and non-electors. 
Table 5 

the Depreciation Plethod Used by- and NonlElectors by lndustrp A Coaaarfson of 

'Electors 

.- Industry 

All Industries 

Agriculture 

Mining 

Contract Construction 

Manufacturing 

Transport a tion 

Communication 

Elec., Gas & Sanitary Services 

Trade 

Finance and Insurance 

Services 

Olfice of the Secretary of Trcnsuq 

17 

Of depreciation metho< 

: Non elector 

43.2 

2.4 

48.3 

6.1 

60.2 

04 

36.1 

3.3 

'31.3 

01 

66.2 

2.4 

27.7 

11.4 

60:h 

38.3 

1.5 

50.2 

9.9 

45.1 

5.9 

48 7 

.3 

76.1 

.5 

12.2 

11.2 

14.3 

.3 

72.3 

13.2 

45.7 

.1 

51.2 

3.0 

60.9 

2.5 

31.1 

5.5 

59.6 

2.2 

31.4 

6.8 

May 3, 1974 

: Depreciation 

method 

s.L. 

1.5 D.B. 

2 D.B. 

S.Y.D. 

S.L. 

1.5 D.B. 

2 D.B. 

S.Y.D. 

S.L. 

1.5 D.B. 

2 D.B. 

S.Y.D. 

S.L. 

1.5 D.B. 

8.Y.%B* 

S.L. 

1.5 D.B. 

2 D.B. 

S.Y.D. 

S.L. 

1.5 D.B. 

2 D.B. 

S.Y.D. 

sOL. 

1.5 D.B. 

2 D.B. 

S.Y.D. 

S.L. 

1.5 D.B. 

2 D.B. 

S.Y .D. 

s;L. 

1.5 D.3. 

2 D.B. 

S.Y.D. 

S.L. 

1.5 D.B. 

2 D.B. 

S.Y.D. 

S.L. 

1.5 D.B. 

2 D.B. 

S.Y.D. 

:PerCentag?e Use 

Elector 

2.3 

2.5 

75.6 

19.6 

61.4

-

17.2 

21.4 

49.1 

2.1 

48.1 

.8 

.a 

79.4 

l8;% 

2.5 

02 

72.6 

24.8 

4.3 

.4 

78.5 

16.9 

-

.2 

97.6 

2.3 

.6 

.2 

73.1 

26.2 

5.9

-

59.8 

34.3 

20.0

-

29.2 

50.8 

6.3 

.3 

76.9 

16.6 

Off'ice of Tax Analysis 
Table 6 

A Cmp.;rissn of the D.!prrcintfoti Elrthods Used 

by E~C-CKO~S and Non-Elcctors ‘by Asset Size 

Assrt size 

($000 ’ s) : Dc:~~~i*c!atjor I nctl1od 

All Asset Sizes S.L. 

1.5 D.B. 

2 D.B. 

S.Y.D. 

0-250 S.L. 

1.5 D.B. 

2 D.B. 

S.Y.D. 

250-500 S.L. 

1.5 D.B. 

2 D.B. 

S.Y.D. 

500-1,000 S.L. 

1.5 D.B. 

2 D.B. 

S.P.D. 

1,000-5,000 S.L. 

1.5 D.B. 

2 D.B. 

S.Y.D. 

5,009-10,000 S.L. 

1.5 D.B. 

2 D.B. 

S.Y.D. 

10,000-50,000 S.L. 

1.5 D.B. 

2 D.B. 

S.Y.D. 

50,000-100,000 s .L. 

1.5 D.R. 

2 D.B. 

S.Y.D. 

100,000-300,000 S.L. 

1.5 D.B. 

2 D.B. 

S.Y.D. 

300,000-600,000 S.L. 

1.5 D.B. 

2 D.B. 

S.Y.D. 

600,000-1,000,000 s .L. 

1.5 D.B. 

2 D.B. 

S.Y.D. 

1,000,000 6 over S.L. 

1.5 D.B. 

2 D.B. 

S.Y.D. 

I Percentage- use 

: Z’lccJor 

2.3 

2.5 

75.6 

19.6 

- 85.7 

14.3 

-

- 100.0-

74.8- 25.2-

6.5

- 93.0 

0.5 

2.3

- 82.6 

15.1 

3.8 

2.2 

74.2 

19.8 

2.5 

0.7 

69.4 

27.4 

6.7 

0.G 

68.2 

24.5 

1.7 

0.2 

63.8 

34.4 

6.9 

0.1 

73.3 

19.7 

1 .o 

0.0 

01.1 

17.5 

18 

of-depreciatioeethod 

: Son-elector 

43.2 

2.4 

48.3 

6.1 

44.7- 55.3-

64.4 

8.4 

25.0 

2.2 

37.2 

7.4 

55.4-

49.4 

2.2 

47.1 

1.3 

45.2 

1.8 

47.3 

5.7 

36.4 

1.8 

51.6 

10.2 

35.0 

1.4 

48.0 

15.6 

40.3 

0.4 

45.7 

13.6 

26.8 

.3 

56.8 

16.1 

29.9- 69.6 

0.5 

37.3 

0.8 

49.8 

12.1 
19 

The other part of a company's depreciation (that part affected by 

ADR) lies in its choice of a tax life over which an asset is depreciated. 

Table 7 shows the average pre-ADR lives used'by electors and non-electors 

and the average ADR life selected by electors. The all industry average 

life of 8.0 years for non-electors was more than 40 percent lower than 

the 14.0 years used by electors, The average asset lives by firm asset 

size class, rather than industry division, are shown in Table 8. With 

the exception of firms with assets of less than $250,000 and $1 to $5 

million, the life used by electors prior to ADR is longer than the life 

used by non-electors. The life used by relatively large companies tends 

1/ 

to be longer than that used by smaller companiGs. 

The asset life differentials Setween ADR electors and non-electors 

shown in Table 7 could be the result of two factors. Non-electors may 

simply have been using a shorter tax life than electors for identical 

assets. A second explanation for the difference is that the lives shown 

are averages for the entire industry, and thus are a weighted average 

of various asset types with various asset lives. Non-electors may have 

-1/ As indicated in the last part of this section, the comparfson of 

average asset lives is not particularly meaningful since differences 

can be due to the use of different lives for identi.ca1 assets andlor 

a different composition of the investment portfolio between long and 

short-lived assets. 
Table 7 

Asset Lives Used by Electors and Non-Electors, by Industry 

: ADR life I Pre-ADP, asset life : selected 

Industry : Electors :Non-electors : by electors 

All Industries 

Agriculture 

Mining 

Contract Construction 

Manufacturing 

Tran8port a t ion 

Cmun i ca t ion 

Elec., Gas & Sanitary 

Services 

Trade 

Finance & Insurance 

Services 

14.0 8.0 12.5 

10.0 7.5 10.5 

11.6 7.0 9.0 

3.0 6.0 3.0 

11.5 9.0 9.5 

10.5 7.5 8.5 

17.5 9.0 13.0 

27.0 5.5 21.0 

9.0 %I. 5 7.5 

15.5 9. 5 13.0 

7.0 6.0 5.5 

Office of the Secretary of Treasury April 30, 1974 

Office of Tax Analysis 
21 

Table 8 

A Comparison ='Asset Lives Used by 

Ele'ctors and Non-Electors by Asset Size 

Asset size Pre-ADK asset life :ADR life selected 

(thousands of dollars) : Electors : Non-electors : by electors 

All Asset Sizes 

0-250 

250-500 

500-1,000 

1,000-5,000 

5,000-10,000 

10,000-50,000 

50,000-100,000 

100,000-300,000 

300,000-600,000 

600,000-1,000,000 

1,000,000 & over 

14.0 8.0 12.5 

3.5 6.0 3.0 

10.0 7.0 10.0 

10.5 6.5 9.5 

7.5 7.5 6.0 

9.5 8.0 8.5 

12.0 8 e0 10.0 

11.0 7.5 9.0 

13.0 9.0 11.0 

14.5 9.0 12.0 

14.5 9.5 12.0 

15.5 8 .O 12.5 

Office of the Secretary of Treasury April 30, 1974' 

Office of Tax Analysis 
22 

placed in service a portfolio more heavily weighted with short-lived 

assets while electors may have invested more heavily in longer-lived 

assets, The life differences are probably a combination of these two 

reasons. The large differences between electors and non-electors in 

the lives used in communication, electric, gas and sanitary services 

and finance and insurance are probably due to differences in investment 

composition. The longer life for non-electors than electors in 

contract construction may also be due to the differences in investment 

composition. 

To completely exclude the effect of the composition of investment, 

we would have to compare the asset lives for electors and non-electors 

in each of the 89 ADR asset classes. The small sample size of the O.I.E. 

survey precludes this type of comparison, but a similar procedure can 

be used. For the O.I.E. survey, companies were asked to state the ADR 

class for each of the assets placed in service. Unfortunately, not all 

firms completed this part of the questionnaire. Those that did provide 

the ADR class designations accounted for nearly 50 percent of total 

investment of ADR electors and 30 percent of the total investment of 

non-electors. For this subset of the O.I.E. survey, it is possible to 

compute the life used by non-electors, the pre-ADR life used by electors, 

the ADR life selected by electors and the weighted average mid-point of 

the ADR allowable life range, Comparing the lives used with the ADR 

mid-point provides some indication as to whether ADR electors were, in 

fact, using longer 1,ivesthan non-electors for identical asset types, 
23 

or whether the asset life differences shown in Tables 7 and 8 are 

due merely to a different composition of investment portfolios 

between long-run and short-lived assets. 

Table 9 provides the data on asset lives for those firms 

completing the O.I.E. survey as required. Since Table 9 excludes 

incomplete records, the industry average asset lives are not 

consistent with the lives presented in Table 7. For example, in 

the contract construction industry, the pre-ADR life used by 

electors is 5.5 years longer in Table 9 than in Table 7. The 

all industry average pre-ADR life is 3.5 years longer for 

electors and 1.5 years longer for non-electors. 

Three relevant points are apparent from Table 9. The first 

point is that electors did have a longer average "Guideline" 

life, -1/ indicating that their investment portfolio was more 

heavily concentrated with long-lived assets. The average "Guideline" life for electors was 17.5 years or about 70 percent 

higher than the average of 10.5 years for non-electors. The 

second point is that non-electors were generally already using 

a life shorter than "Guideline" thus reducing the potential benefit 

from electing ADR. By contrast, ADR electors were using an 

average life exactly equal to or higher than the "Guideline" 

life. -2/ Finally, Table 9 indicates that the electors in this 

subsample tended to select the lower limit of the ADR allowable 

life range. 

I/e average guideline life is the midpoint of an assetZs life 

allowed under ADR. 

21 As show in the text Qectiop, the potential for a. greater life - reduction in com ination with a higher level of investment 

results in a much higher potential benefit from ADR for

electors than non-electors. 
24 

Table 9 

A Comparison of the Average Pre-ADR Life and Average "Guideline" Life 

'for Electors and Non-Electors and the Average ADR Life 

Selected by ADR Electors by Industry 

Elector s Non-elect ors 

: Average : : Average 

: Pre-ADR :ADR life :"Guideline" : Pre-ADR :"Guideline" 

Industry : life used :selected : life :life used : life I 

All industries 

Agriculture 

PIiniiig 

Contract construction 

Manufacturing 

T ransp ort at ion 

Cmunicat:ion 

Elec., Gas & Sanitary

Services 

Trade 

Finance, Insurance 

Services 

17.5 14.0 17.5 9.5 10.5 

17.5 11.5, 14.0 10.5 11.0 

13.0 10.5 12.5 10.0 10.5 

8.5 5.5 6.5 5.5 5.5 

12.0 10.0 12.0 11.0 11.5 

13.0 10.5 12.5 10.0 9: 5 

21.5 18.5 23.0 10.0 22.0 

27.5 21.5 27.5 24.0 24.0 

9.0 7.5 9.0 8.5 10.0 

16.5 13.0 15.5 9.5 9.5 

7.0 6.0 6.5 7.5 7.5 

Office of the Secretary of Treasury

Office of Tax Analysis 

April 30, 1974 
25 

The results of Table 9 should be interpreted carefully. 

The fact that the lives are longer than thoseobtained from the entire 

sample should be of concern, We do not know the relationship between 

the shorter lives excluded due to incomplete data, and the "Guideline" 

lives. 'In fact, there is evidence that the ADR electors excluded were 

using lives somewhat shorter than "Guideline" lives since Table 7 indicates an average life reduction of only 11 percent rather than the full 

20 percent indicated in Table 9. Either some firms did not select the 

lower limit of the ADR life range or they were already using a life 

shorter than the "Guideline" life. 
26 

Section 4 

Benefits of ADR Election 

The decision of a firm whether to elect the ADR system is 

based on the expected costs and benefits from the system, The 

only cost to the firm is that involving preparation of data which 

the company must supply as a requirement for election. Each type 

of asset must be classified in an Asset Guideline Class and an 

account kept of this class including such items as the age, 

adjusted basis, year of acquisition and retirement of each 

individual type of asset. hlost companies, and certainly the large 

companies, already use a similar accounting procedure, but some 

additional cost may be involved in reorganizing the existing accounts. 

The benefits of electing ADR are: 

(1) A shorter asset life for tax purposes, resulting in a larger 

present value of the tax depreciation deduction; 

(2) Less audit controversy over the asset life selected by the 

taxpayer ; 

(3) A much simpler method of classifying assets for purposes 

of tax depreciation, 

The relevant question then is whether the benefits are greater 

than the costs of electing ADR. Unfortunately, it is difficult to 

estimate the costs of election, thus we will be concerned only with the 

benefits of ADR. The quantifiable benefits (item (l), above) are 

cornputed by comparing the present values of tax depreciation deductions 

with an without the ADR system. The difference between the present 

values using the pre-ADR life and the ADR life is a measure of the 

benefit of ADR. Present values are calculated using a 10 percent discount 

rate. The benefit is positive if the ADR life is shorter than the 

pre-ADR life and negative if the ADR life is longer than the pre-N)R 

life. 
Table 10 shows the dollar amount of benefit, the average benefit 

per firm and the average benefit per dollar of investment received by 

ADR electors by industry division. Agriculture shows the only negative 

benefit and is consistent with the asset life shown in Table 7. The 

pre-ADR asset life for electors in agriculture was 10.0 years while 

the ADR life they selected was 10.5 years. The average loss per firm 

in agriculture was only $100. This result is consistent with rational 

> 

behavior if we assume that the benefits received from the reduction of 

no audit controversy and the simplified method of classification offset 

this loss. 

The total benefit to electors of $902 million produced an average 

benefit per firm of about $1,000 or 2.4 cents for every dollar of 

investment. The total benefit, average benefit per firm and average 

benefit per dollar of investment varied considerably across industries. 

The average benefit per firm and total benefit are, of course, affected 

by the level of investment whereas the average benefit per dollar of 

investment depends only on the asset life reduction allowed by the ADR 

11 

electioz. Communication and electricity, gas and sanitary services 

receive nearly 60 percent of the total benefit of ADR while accounting 

for only 43 percent of total investment under ADR. The fact that they 

receive a greater percent of benefits than their percent of total 

investment indicates that they snjoyed a larger asset life reduction 

than the average. As irzdicated in section 2, both of these industries 

-1/ The depreciation method also affects the benefit, but the present 

use of depreciation nethods does not vary enough between industries 

to significantly affect the relative benefits. 
Table 10 

The Benefit Received by ADR Electors by Industry Division, 1971 

- :Average benefit 

: Average benefit :per dollar of 

: Total benefit : per firm : investment 

Industrv :(millions of dollars) :(thousands of dollars) : (Percent) 

All Industries 

Agriculture 

?I ining 

Contract Construction 

bl anu factu ring 

Transporta tion 

Cmunication 

Elec.,' Gas & Sanitary

Services 

Trade 

Finance & Insurance 

Services 

902.2 1.0 2.4 

-.l -0.1 -0.5 

3.4 0.8 1.0 

* 9.2 0.8 

301.4 0.9 2.0 

44.2 1.0 2.0 

241.7 23.3 3.1 

274.6 9.6 2.8 

15.1 0.1 1.5 

9.3 0.4 2.3 

3.2 0.2 0.7 

Office of the Secretary of Treasury

Office of Tax Analysis 

May 1, 1974 

*Less than $50. 
29 

had been using an asset life approximately equal to the "Guideline" 

l$fe and thus, by electing ADR, firms in these industries were able 

to reduce their lives by nearly the full 20 percent allowance. 

Manufacturing companies arLounted for another 30 percent of the total 

benefit which was less than their nearly 41 percent share of total 

investment under ADR. 

Table 11 shows the same values as Table 10, but is tabulated by 

asset size. As expected, total benefit increases with asset size. 

The average benefit per dollar of investment shows a slight, but erratic, 

increase as asset size increases, which is consistent with the asset 

lives presented in Table 8. 

Tables 10 and 11 show the actual benefit received by ADR electors. 

Benefits were computed using the average pre-ADR life and the average 

ADR life selected by electors. An important question left unanswered 

is what the benefit would have been for non-electors had they decided 

to elect. To address this question, the ADR class must be known so 

as to compute the maximum allowable life reduction. As indicated in 

section 2, not all firms provided this data. The same subsample used 

to generate Table 9 of section 2 is used here, and the same qualifications 

also apply. 

Table 12 shows the average potential benefit per company and the 

average potential benefit per dollar of investment by asset size class, 

The first four columns of the table show the average benefit per company 

1/ 

for all companies and for only those companies with positive investmeit. 

-1/ Zero investment results in a zero benefit. 
30 

Table 11 

The Benefit Received by ADR Electors by Asset Size, 1971 

: Average benefit : Average benefit 

: per firm : per dollar 

Asset size Total benefit : (thousands : of investment 

(thousands of dollars): (millions of dollars) : of dallars) (Percent) 

Total 902.2 1.0 2.4 

0-250 7.8 * 0.7 

250-500 0.0 0.0 0.0 

500-1,000 1.3 Y 1.2 

1,000-5,000 4.3 * 0.8 

5,000-10,000 5.3 0.1 1.8 

10,000-50,000 21.8 0 02 2.4 

50,000-100,000 25.0 0 -8 2.6 

100,000-200,000 29.6 1.2 2.2 

200,000-300,000 26.0 1.7 2.1 

300,000-600,000 90.8 4.8 2.4 

600,000-1,000,000 62.9 6.5 2.0 

1,000,000 & over 627.3 27.8 2.6 

Office of the Secretary of Treasury May 1, 1974 

Office of Tax Analysis 

*Less than $50. 
31 

With the exception of one asset class which showed a negative ADR benefit 

($1 million to $5 million), the firms electing ADR had a higher potential 

benefit from election than those which did not elect, The higher 

potential benefit is due to the fact that electors were using a longer 

life than non-electors prior to the initiation of ADR, and that their 

level of investment in 1971 was higher than non-electors, 

The last two columns of Table 12 reflect the ADR benefit due only 

to the potential life reduction all6wed under ADR. Again, only the 

$1 million to $5 million asset size class shows a negative benefit for 

electors. In all but two asset size classes the potential benefit of 

ADR for electors was higher than for non-electors. This result indicates 

that non-electors were using a life shorter than electors prior to the 

initiation bf ADR. This result is consistent with the lives for electors 

and non-electors shown in section 2 above. 
Table 12 

Maximum Average - Benefit per Company and iverage Benefit per Dollar of Capital Expenditure

for ADR Electors-and Non-Electors by Asset Size Class; 1971 

Average benefit per company (thousands of dollars) 

Only companies with :Average benefit per dollar 

Asset size All companies Dositive investment - : of investment. (percent) 

($000’9) : Elector :“-elector : Elector : Non-elector : Elector :Non-elector 

0-250 

250-500 

500- 1,000 

1,000-5,000 

5,000-10,000 

10,000-50,000 

50,000-100,000 

100,000-200,000 

200,000-300,000 

300,000-600,000 

600,000-1,000,000 

1,000,000 or more 

Average 

2.6 * 5.2 -3.8 5.2 -3.8 

3.4 * 3.4 3.4 3.4 04 

1.8 -.l 2.1 -1.3 1.8 -.6 

-3.1 .1 -5.7 1.4 -1.6 .5 

5.3 -.4 6.6 -2.3 1.4 -.6 

19.3 1.4 20.6 6.6 2.1 1.2 

56.0 6.7 57.2 10.8 1.9 1.3 

170.4 10.7 177.3 16.5 3.2 1.4 

154 0 28.8 154.0 37.9 2.1 2.0 

510.7 -2.2 516.1 -2.5 2.5 -.2 

1,083.4 149.2 1,104.2 197.7 2.5 2.8 

2,182.5 169.9 - 2,182.5 174.7 2.7 1.6 

51.2 .1 74.5 2.3 2.5 .6 

Office of the Secretary of Treasury May 2, 1974 

Office of Tax Analysis w 

h) 
. 

Table 13 

Maximum Average Benefit per Company and Average Benefit per Dollar of Capital Expenditure

for ADR Electors and Non-Electors by Major Industry, 1971 

: Average benefit per company (thousands of dollacs) . Only companies with :Average benefit per dollar 

All combanies positive investment . of investment (percent) 

Industry : Elector : Non-elector : Elector : Won-elector : Elector : Non-elector 

Agriculture 9.4 * 9.4 11.7 4.7 2.3 

Mining 54.6 09 211.1 11.9 3.3 1.1 

Contract Construction 1.8 * 3.6 3.7 2. 7 1.0 

Manufacturing 53.1 02 58.1 6.8 2.1 1.3 

TransportatIon 72.6 02 86.5 3.1 2.4 05 

Camnunication 147.7 -2.4 152.2 -30.0 2.2 -8.4 

Utilities 612.1 2.8 975.63 33.3 3.3 2.3 

Trade 15.2 * 33.1 0.8 2.0 -.'3 

Finance 73.3 01 73.3 09 2.8 04 

Services 15.2 * 16.2 2.9 1.1 08 

Average 51.2 01 74.5 2.3 2.5 e6 

Office of the Secretary of Treasury May 2, 1974 

Office of Tax Analysis w 

w 
34 

While the average benefit per company greatly increases with the 

size of the company, the average benefit per dollar of investment does 

now show the same dramatic increase. The second and third smallest 

asset size classes show the largest average benefit per dollar of investment. Apparently the average life change allowed by ADR does not vary 

appreciably by size of firm, The large increase in the benefit per 

firm is the result of higher investment levels by larger firms. 

Table 13 shows the same information provided in Table 12 by major 

industry group rather than by asset size, Much the same result obtained, 

Those firms that elected ADR had a higher potential ADR benefit than 

non-electors in all industries. The average benefit per dollar of 

investment varied from 1.1 percent to 4.7 percent with an all industry 

average of 2.5 percent. Industries dominated by large companies 

(communication and utilities) showed a high average benefit per firm 

1/

with an all industry average of about $51 thousand: 

-1/ The all industry average benefit per firm for electors is more than 

30 times the potential benefit per firm for non-electors,whereas 

the average benefit per dollar of investment for electors.is only

four times the potential benefit per dollar of investment for nonelectors, This difference again testifies to the fact that 

primarily large firms elected ADR. 
35 

Section 5 

A Comparision of the Asset Lives and 

Depreciation Method Used For Selected Years Since 1954 

Before 1954, taxpayers were generally limited to the 

straight-line depreciation method. L/ In 1954, depreciation 

allowances were liberalized to allow general use of accelerated 

depreciation. Declining balance methods at 1.5 and 2.0 times the 

straight-line rate were allowed as well as the sum-of-years digit 

method, These accelerated methods allow a faster write-off of 

capital expenditures and therefore reduce the cost of capital. 

Table 16 shows the relative usage of the principal depreciation 

methods for the period immediately following the 1954 tax law 

change (1954-1959) and for 1971. The use of straight line has 

declined more than 50 percent during the period while the use of 

the declining balance methods has more than doubled. 2/ 

The contract construction industry and the transportation, 

communication, and electric, gas and sanitary service industries 

had the most dramatic change. During the 1954-1959 period 

about 60 percent of the investment in these industries was 

depreciated using the straight-line method. By 1971, less than 

20 percent used straight line in contract construction and only 

7.7 percent of the investment in the transportation communication, 

gas, electric and sanitary service industries used straight line. 

I/ Accelerated depreciation methods were allowed in selected - cases prior to 1954. 

-21 The decrease in the use of the most rapid method of 

depreciation (S.Y.D.) is confusing and unexplained anomaly. 
36 

Table 17 shows the average asset life used by taxpayers during the 

1954-1971 period. There was a significant decline in asset life between 

the pre-1954 period and the 1954-1959 period, For all industries, the 

life remained the same until the initiation of ADR which decreased the 

average life by 14 percent to 12.5 years. The ADR system allows a 

20 percent life reduction from the "Guideline" lives, but not all taxpayers that could have reduced their asset life elected ADR and some 

of those that did elect ADR were already using a life less than 

"Guideline" resulting in an overall reduction of 14 percent rather than 

20 percent. 

All but two of the industries in Table 16 show an increase in asset 

life between the 1954-1959 period and 1970. Most likely, asset lives 

remained about the same during the period, The O.I.E. survey is a 

relatively small sample and is subject to coefficient of variations of 

about 10 percent, In addition, the asset lives calculated from the survey 

may be biased upwards, This possible bias is due to the type of 

respondents to the questionnaire. The intent of the survey was to 

determine who elected ADR and why ADR was elected, One would expect, 

therefore, that the respondents would be heavily weighted with ADR 

electors,and this is the case. Since one reason to elect ADR is to 

obtain a shorter tax life, ADR electors were generally using a tax life 

longer than the non-electors. Thus, since electors generally used a 

longer tax life than non-electors and they are heavily weighted in the 

sample, the tax lives may te biased upward. 
Table 1. 37 

Comparison of Percent Use Depreciation Methods Used for Tax Depreciation 

of Machinery and Equipment in Selected Years by Major Industry 

Indus t rv 

All Industries 

Agriculture 

Mining 

Contract Construction 

Manufacturing 

Transportation, etc. 

Wholesale & Retail Trade 

Finance, etc. 

Services 

Year of use 

Method 1954-1959 : 1971 

s .L. 44.4 18.3 

D.B. 29.7 66.7 

S.Y.D. 22.8 14.2 

Other 3.1 .a 

s .L. 82.0 60.3 

D.B. 16.1 35.7 

S.Y.D. 

Other 

1.7 

.2 

4.0

- S.L. 47.9 32.8 

D.B. 19.9 59.5 

S.Y.D. 1.9 2.0 

Other 3q.3 5.8 

S.L. 62.3 18.1 

D.B. 31.5 73.8 

S .Y .D. 6.2

- 6.6 

Other 1.6 

S.L. 30.2 15.7 

D.B. 33.4 64.8 

S.Y.D. 33.5 19.2 

Other 2.9 .3 

s .L. 60.3 7.7 

D.B. 26.3 77.9 

S.Y.D. 10.8 14.0 

Other 2.6 .4 

s .L. 60.0 38.5 

D.B. 20.1 52.8 

S.Y.D. 19.3 8.7

Other .6 -

S.L. 67.3 49.4 

D.B. 23.0 32.3 

S.Y.D. 

Other 

9.6 

.1 

18.3

-

S.L. 57.0 49.4 

D.B. 33.5 36.6 

S.Y.D. 9.5 7.5 

Other I 6.5 

Office of the Secretzry of Trensury April 22, 1974 

Office of' Tax Analysis 
38 

Table 17 

Comparison of Asset Life Used for Tax Depreciation of Machinery ani 

Equipment in Selected Years by Major Industry 

-~ ~ 

Year of use 

Industry 1954 II_: 1951~-1959 : 1970 : 1971 

All Industries 

Agriculture 

Mining 

Construction 

Manufacturing 

Transportation 

Communicat ion 

19.3 14.3 14.5 12.5 

17.9 7.9 8.5 8.5 

9.1 9.2 9.5 9.5 

11.9 5.6 5.5 5.0 

17.1 14.0 11.0 10.0 

( 

( 

(23.3 17.7 21.7 17.6 

( 

Elec., Gas & Sanitary Serv. ( 

Wholesale & Retail Trade 13.4 9.4 10.5 10.5 

Finance, Ins., & Real Estate 16.4 9.7 12.5 11.5 

Services 12.0 6.9 7.0 7.5 

Office of the Secretary of Treasury April 22,1974 

Office of Tax Analysis 
39 

APPENDIX A 

A Description of the 1973 Survey of 

Recent Experience With Tax Depreciation Rules 

(Office of Industrial Economics (OIE) Survey) 

The OIE Survey is based on a subsample of firms selected 

from the 1970 Corporate Statistics of Income (SOI) sample. 

The 1970 Corporate SO1 is a stratified sample 

of about 110,000 firms representing a tax filing population of 

nearly 1.75 million corporations, 1 

For purposes of the OIE Survey, a stratified sample of 

10,000 returris as selected, Zuestionnaires were sent to these 

corporations in February, 1973, with telephone and mail follow-up 

to nonrespondents by March, 1973. The selection rates for the 

OIE sample are shown in Table 1. The rates vary from a low of 

one in 300 for firms with assets of less than $5 million in 

the Finance, Insurance and Real Estate Industry (SIC Industry 

Code 60) to a high of one in one for large firms. 

'A detailed description of the Corporate SO1 sample is available 

in the Statistics of Income 1970, Corporation Income Tax Returns, 

Department of the Treasury, Internal Revenue Service, Publication 

16 (4-741, U.S. Government Printing Office, Washington, D.C. 

20402, pp. 187-191. 
-- 

Table 1 

Rates Uoed for Subsmpling SO1 

SIC Industry (I 120) 1 AI~

Asaet ~ 

~ndustry- 1120s 

Size 01 - 39 40 - 49 50, 52 60 70 - 80 Asset Size Rate ~~ 

< 50,000 5 50,000 

1/50 7/50 1/100 1/300 1/50 or not reported 1/100 

50,000 50,000 

< 250,000 1/15 1/10 1/50 1/300 1/25 < 100,000 1/20 

250,000 

< 5 million 1/10 v3 1/25 v300 1/10 

100,000 

< ~00,000 1/10 

5 million -& million 

< 10 million 1/4 1/10 1/200 1/3 1 million 1/3 

10 million 1 million 

< 25 million 1/200 < 5 million 1/30

1. I 

25 million 5 million 

< 50 million e -10 million 

50 million z 10 million 

rp

0 
41 

While the sample size was relatively large, the response 

rate was only about 40 percent, Only about 4,100 firms returned 

a completed questionnaire. However, the response rate was 

nearly 70 percent for firms with assets greater than $50 million and nearly 83 percent for firms with assets greater than 

$1,000 million, Thus, the survey has an excellent representation 

of large firms. The actual number of firms selected for the 

sample and the corresponding number of firms responding in a 

particular stratum are shown in Tables 2 and 3. 
-- -- 

TABLE 2 

SAIQLE SELECTED BND RESPONSE BY INDUSTRY AND ASSET SIZE I 

Asset 

Size 01 - 39 1 40 - 49 50, 52 I 60 70 - 80 ui 1120s Total 

Select Response Select Response Select Response Select Response Select Response Seleot Response Select Responae 

e 50,000 -;aM- 5 63 9 34 5. 202 25 

so, 000 

250,000 315 I 62 1 81 20 

250,000 

c 5 million 1 431 464 158 I 

5 million 

10 million 459 

935 

148 

z 50 million 

Total 4,853 

I I 

190 198 70 71 27 12 

388 288 143 144 62 31 

345 121 63 225 92 34 

804 346 268 243 139 222 

2,227 1,510 722 1,262 494 328 

For 11205 interval of asset size is $50,000 $100,000 

2/ For 11205 interval of S*sset size is $100,000 $5 million 
-- -- 

-- 

-- 

TABLE 3 

SAMPLE SELECTH) AND "SE BY INIWSTBY AND ASSET SIZE 

800 < 900 million 11 8 7 5 4 3 5 3 2 1 29 20 

900 < loo0 million 14 10 5 5 4 4 1 I 25 19 

1 < 1.3 billion 23 21 18 16 2 2 7 2 1 1 51 42 

1.3 1.6 billion 20 19 14 11 3 37 30 

1.6 1.9 billion 16 14 7 6 2 25 20 

3 1.9 billion 44 37 29 25 4 3 7 6 84 71 

Total 1,152 804 I 346 268 243 I 139 222 121 101 49 i 2,064 1,381 
44 

APPENDIX B 

The Questinnnaire Used in the 

1973 Survey of Experience With Recent Tax Depreciation Rules 

A copy of the questionnaire follows. It consisted of three 

parts, Part I requested general information concerning depreciation 

practices. Part I1 requests specific information from both ADR 

electros and non-electors concerning the asset life and depreciation method used by the firm by type of asset, In addition to 

lives and methods, the firm was asked to report the amount of 

investment in each type of asset. Finally, the last part of the 

questionnaire asked questions about the usefulness of the ADR 

system as well as soliciting suggestions for change. 
--- 

--- 

hime 2nd eddross 

of 

CZ"pJny 

repor:ing p&

Ths !BX year of this comp3ny ends ........... -.__ 

(Month) (Day)

This company files conb?lid~trdtax returns 

@,-- 2. 

Yes I'!O 

/A2 45 

I1 

SXUF 200000002 

111127990 

HEAD, TAX DEPARTMENT 

NATIONAL SPINNING CO., INC. 

168 MADISON AVE. 

NEW YORK, N.Y. 10016 

1973 Surrey of Expariencz with Rswnt Tax-Depreciation Rulss 

@ Name of Prspdrcr 

-7ekphona Ndmbar 

An income t3x return !or tha ysai endicg in 

has been fiid by this Company I. 

Yes No 

Totai number of compdnks in latest corrsJlidatacl 

tax return 

PAR?' I 

Cz~reci~tkn?;ocoo'i!res Used of TO be L'sd in 

income Tax Retlrt,ns far Tm Yzxs Ending in 

7979. 7971. and '1372 

1. With respzct to your dzprxisbl? assets xquirc-d 

during tax years ending brforz Jariusry.1, ;971, 

under what method wyJe you justifying the 

depreciation lives you uw?usicq for tax purposrs 

in i970? 

la. If you checked ''fxts and circumstanca", 

werc the lives you justified ............... 

lb. If you chxkcd "guidelines", were the liv2s 

you justified.. ........................ 

2. For clepicciabt-. 2552ts ~:,iced in rerJice since 

January 1. 1971, have you fll3i an election to us? 

ADR, by th: dat? on wh;ch you receivd this 

form? (Chxk one far exh yzx) 

(Chxck he)' 

facts and circumsiancej ............ 

guic!aIinrs, as provided in Raer?u?P:o. 

cedLcre 62.21, or Rev. Pioc. 62.i.62.2 

&62.7 ......................... 2.­

(Ch&C!tsne; 

about !he s~mdas ".pi&line" 

shorter ~iiari"guidrihz" liv:j? 

loriyer then "guideline" iives? 3. 

(Chxk One) 

'12.35 prapzrtb except sa>&!­

izry awts. .:-. ..... ._.......4!'\ __ __ ,!). _ _____ f J no .:............:.: ......5--- 5-
The company does not fully understand 

ttrs Nh3 systam or rcquiramants lor 

Xselection ..................... The deprecia?ion[)or,odsi\o:mallFtJ$&d 

try tlip corrpmy are cot mdterially 

longer rhsn the deprtciat;on periods 

available under ADR .............. The cornnany does not contemplate additions in amounts sufficient to war­

-rant the election ................. The xcountiriy and reporting requirements of on ADR election are too 

burdensome .................... The company is a regulated public 

utility acid does not choose to use tax 

deprxiation lives which are differgnt 

from those prescribed for itby its 

regulaiory authority ............. Th; company's net operatiog loss carryfur" is too large to warrant in 

crwses in cJrrant deductions undw 

AD [I .......................... Other: (pkm explain) ............. 

Part I!: Tax Clepretiation I'ieim Fielaring to Assets Piemf in Service duriiig Tax Veers Ending in 1970, 1977..and 1972 

Schedule B: Ccmpanies electing to use ADFI. (Plhssc?refu to instructions and expla ut;*lrrrzrrp.i 

-a.-.m 

2. Transportation ehuipment: 

I 

' ,4. EliQiMeSection la5 tym excluded fmm el 

6. tndigiblr Section 1245PIOP.CN.. ................... I 

01 Vel depmtablqp~~~ond fwqxwtv tscCrion 1*5 proparty) 

YL 

iv. 

1.S the ~oslght,ltno 

an so ;ndcatc entering "0" whe 

tion for rubstantirliy all inirctincnlsof companies rcportcd in the Schedule but connot readily do so for 1l.c rernainder, enter JS nuci; as porsUs in section til. fhe section (iil totals should reflect rU new investment, indudrig additions for tvnich co-npifie infornution is Rat 

available. 

L 

QD 
49 

cl. With respect to the eligible d?prtxciabk x;etsondl praperty 

1245 property") which your company R~Spl~lcedin 

and is planning to place in setvice in 1873: ilo ti:. deprwci.i,ion 

provided by Revenue Procedure 72-10 senzrdly result in ..appropriate 

allowariccs for depreciation and obsolzwenre in viaw of your cornpany's forecast of conditions ow their rtxpxbd Ixriod of ;arvlcs?. 

(If you armver "no." pl.?dse msw3 t?,? folicwiiig aid fi1r.h the 

table below.) 

(i) Anticipated future technolo$.& G:mImentC wSI nr.c:c~.ssi. 

tate more rapid replxemsnt7 

(ii) Existing circumstances and experierici! to date indicate 

such aswts should be replaced piior to the oncl of wch 

daprcciation periods? 

(iii)Other {explain in remarks). 
2. In your opinlon and experience: 

a. is projectud tar depreciation a significant consideration in evaluating . .-- -

capital investment proposls 

(i) generally; or 

(ii)zi the marginwhere decisions are not clearly dicutd by 

other factors? 

b. In $,cnarel, vbhat will be the effect of the Clau Life (ADH) system on - your invtrt;:ini in machinary and equipment during 197378 (d58UrW 

ing ail otiizi ixtors affacting marginal cost of invmtmmt ramah 

coristan t) 7 (Chsdtys Apwopriata) 

(iii)Will affect expansion. 

"If you chxk more than one, ptease number in order of importance, "1" for Imporxsa. 

3. Remarks: 

Suggested changes inADR guideline asset class definitions: 

(Please cite class rmmbers.) 

Suggested changes inADR repai~~wu wte: