Source: http://www.irs.gov/irb/2004-06_IRB/ar09.html
Timestamp: 2015-07-28 01:34:53
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Internal Revenue Bulletin - February 9, 2004 - T.D. 9105
Internal Revenue Bulletin: 2004-6 February 9, 2004 T.D. 9105
Changes in Computing Depreciation Table of Contents
This document contains regulations relating to a change in computing depreciation or amortization as well as a change from
a nondepreciable or nonamortizable asset to a depreciable or amortizable asset (or vice versa). Specifically, these regulations
provide guidance to any taxpayer that makes a change in depreciation or amortization on whether such change is a change in
method of accounting under section 446(e) of the Internal Revenue Code and on the application of section 1016(a)(2) in determining
whether the change is a change in method of accounting. The text of these temporary regulations also serves as the text of
the proposed regulations (REG-126459-03) set forth in the notice of proposed rulemaking on this subject in this issue of the
Applicability Dates: For dates of applicability, see §§1.167(e)-1T(e), 1.446(e)-1T(e)(4), and 1.1016-3T(j).
Background This document contains amendments to 26 CFR part 1 to provide regulations under sections 167, 446(e), and 1016(a)(2) of the
Internal Revenue Code (Code). These regulations provide the changes in depreciation or amortization that are, and are not,
a change in method of accounting under §1.446-1(e). Additionally, these regulations amend §1.167(e)-1 to provide that certain
changes in depreciation method for property for which depreciation is determined only under section 167 are made without the
consent of the Commissioner of Internal Revenue, and amend §1.1016-3 to provide that section 1016(a)(2) does not permanently
affect a taxpayer’s lifetime income for purposes of determining whether a change in depreciation or amortization is a change
in method of accounting. Explanation of Provisions: Background Section 446 provides in general that taxable income shall be computed under the method of accounting on the basis of which
the taxpayer regularly computes the taxpayer’s income in keeping the taxpayer’s books. Section 446(e) provides that, except
as otherwise expressly provided in chapter 1 of the Code, a taxpayer who changes the method of accounting on the basis of
which the taxpayer regularly computes the taxpayer’s income in keeping the taxpayer’s books shall, before computing the taxpayer’s
taxable income under the new method, secure the consent of the Secretary.
Section 1.446-1(e)(2)(ii)(a) provides in pertinent part that a change in method of accounting includes a change in the overall plan of accounting for
gross income or deductions or a change in the treatment of any material item used in such overall plan. A material item is
any item that involves the proper time for the inclusion of the item in income or the taking of a deduction. However, §1.446-1(e)(2)(ii)(b) provides in pertinent part that a change in method of accounting does not include an adjustment in the useful life of a
depreciable asset. Although such adjustment may involve the question of the proper time for the taking of a deduction, such
item is traditionally corrected by adjustments in the current and future years.
Section 1.167(e)-1(a) provides that in general, any change in the method of computing the depreciation allowances with respect
to a particular account (other than a change in method permitted or required by reason of the operation of former section
167(j)(2) and §1.167(j)-3(c)) is a change in method of accounting, and such a change will be permitted only with the consent
of the Commissioner, except that certain changes to the straight line method of depreciation will be permitted without consent
as provided in former section 167(e)(1), (2), and (3). Any request for a change in method of depreciation shall be made in
accordance with section 446 and the regulations under section 446. In 1996, the IRS issued Rev. Proc. 96-31, 1996-1 C.B. 714, providing that a change from not claiming the depreciation or amortization
allowable to claiming the depreciation or amortization allowable is a change in method of accounting for which the consent
of the Commissioner of Internal Revenue is required. In Kurzet v. Commissioner, 222 F.2d 830, 842-845 (10th Cir. 2000), the taxpayer sought to change the classification of property under section 168 from nonresidential real property
to 15-year property thereby resulting in a change in recovery period from 31.5 years to 15 years. The Tenth Circuit held
that a change in recovery period under section 168 is a change in method of accounting under section 446(e). In reaching
its holding, the Tenth Circuit considered the taxpayer’s argument that a change in recovery period is analogous to a change
in useful life, but concluded that the Commissioner’s interpretation of §1.446-1(e)(2)(ii) in Rev. Proc. 96-31 as requiring
a taxpayer to obtain permission for a change in recovery period is not plainly erroneous or inconsistent with §1.446-1(e)(2)(ii).
In Brookshire Brothers Holding, Inc. & Subsidiaries v. Commissioner, 320 F.3d 507 (5th Cir. 2003), aff’g. T.C. Memo. 2001-150, reh’g en banc denied, 65 Fed. Appx. 511 (5th Cir. 2003), the Fifth Circuit held that a change in classification of property under section 168 is not a change in method
of accounting under section 446(e) because the change is the functional equivalent of a change in useful life thereby resulting
in the change falling under the useful life exception in §1.446-1(e)(2)(ii)(b). The Eighth Circuit in O’Shaughnessy v. Commissioner, 332 F.3d 1125 (8th Cir. 2003), rev’g in part 2002-1 U.S.T.C. (CCH) ¶50,235 (D. Minn. 2001), adopted the analysis in Brookshire and held that a change in classification of property under section 1 68 falls within the useful life exception and, thus,
does not constitute a change in method of accounting under section 446(e).
Further, in Green Forest Manufacturing Inc. v. Commissioner, T.C. Memo. 2003-75, the Tax Court extended its reasoning in Brookshire. The court held that a change in computing depreciation from the general depreciation system in section 168(a) to the alternative
depreciation system in section 168(g) is a change in classification that falls within the useful life exception and, therefore,
is not a change in method of accounting.
As a result of these decisions, there is inconsistent treatment of taxpayers with respect to whether a change in computing
depreciation under section 168 is a change in method of accounting under section 446(e). These regulations clarify the changes
in depreciation or amortization (depreciation) that are (and are not) changes in method of accounting under section 446(e).
Scope The regulations provide the changes in depreciation for property for which depreciation is determined under section 167, 168,
197, 1400I, 1400L(b), or 1400L(c), or former section 168, of the Code that are (and are not) changes in method of accounting
under section 446(e). The regulations also clarify that the rules in §1.167(e)-1 with respect to a change in the depreciation
method made without the consent of the Commissioner apply only to property for which depreciation is determined under section
167 (other than under section 168, section 1400I, section 1400L, or former section 168).