Source: http://www.commercialcostcontrol.com/cost_segregation_study/irs_audit_techniques_guide/change_in_acct_method.html
Timestamp: 2018-08-21 06:46:28
Document Index: 188304516

Matched Legal Cases: ['§ 446', '§ 168', '§ 1', '§ 1', '§ 1', '§ 168', '§ 168', 'art 2002', '§ 1', '§ 1', '§ 446', '§ 1', '§ 481', '§ 1', '§ 481']

Change in Acct Method Cost Segregation
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Cost Segregation ATG - Chapter 6.2 Change in Accounting Method
Note: Each chapter in this Audit Techniques Guide (ATG) can be printed individually. Please follow the links at the beginning or end of this chapter to either return to either the previous chapter or the Table of Contents or to proceed to the next chapter.
Chapter 6.1 | Table of Contents | Chapter 6.3
APPENDIX - CHAPTER 6.2 - CHANGE IN ACCOUNTING METHOD
In recent years, the historical position of the Service was challenged in several court cases. The Fifth Circuit, affirming the Tax Court, held that the reclassification of gas station properties as 15-year property for MACRS purposes was not a change in accounting method requiring the Secretary's consent [Brookshire Brothers Holding, Inc. & Subsidiaries v. Commissioner, 320 F.3d 507 (5th Cir. 2003), aff’g T.C. Memo. 2001-150, reh’g denied (March 31, 2003)]. The Circuit Court agreed with the Tax Court that the then-existing regulations were meant to allow taxpayers to make temporal changes in their depreciation schedules without the consent of the IRS. The Court also affirmed that Brookshire's change in the classification of its gas station properties from straight-line depreciation of non-residential real estate to declining balance depreciation of 15-year property was not a change in Brookshire's method of accounting under IRC § 446.
The decision of the Fifth Circuit in Brookshire conflicts with the opinion of the Tenth Circuit in Kurzet v. Commissioner, 222 F.3d 830, 842-845 (10th Cir. 2000). In Kurzet, the taxpayer sought to change the classification of a reservoir from nonresidential real property to 15-year property under § 168, thereby resulting in a change in recovery period from 31.5 years to 15 years. The taxpayer did not change the method of depreciation for the reservoir, which was the straight-line method of depreciation. Although the Tenth Circuit found "some persuasive value to the [taxpayer’s] argument that a change in recovery period under MACRS should be treated like a change in useful life," the court concluded that the Commissioner’s interpretation of § 1.446-1(e)(2)(ii) 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 addition, the Tax Court in Standard Oil Co. (Indiana) v. Commissioner, 77 T.C. 349, 410-411 (1981), held that a change in depreciation method resulting from a reclassification of depreciable property from section 1250 property to section 1245 property is a change in method of accounting. In reaching its decision, the court cited to §§ 1.167(e)-1 and 1.446-1(e)(2)(ii)(a), and explained "It is unquestioned that a change in the method of computing depreciation is a change in method of accounting." Id. at 410. (But see, Green Forest Manufacturing Inc. v. Commissioner, T.C. Memo. 2003-75, which followed Brookshire by holding that a change in computing depreciation from the general depreciation system in § 168(a) (GDS) to the alternative depreciation system in § 168(g) (ADS) is not a change in method of accounting, and 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), which also followed Brookshire by holding that a change in classification under MACRS is not a change in method of accounting.)
Clearly, this area of law has been unsettled in recent years, due to the conflicting court opinions. However, temporary regulations covering this issue have been promulgated. Treas. Reg. § 1.446-1T(e)(2)(ii)(d)(2)(i), effective for taxable years ending on or after December 30, 2003, provides that a change in the depreciation or amortization method, period of recovery, or convention of a depreciable or amortizable asset is a change in method of accounting. See Example 9 of Treas. Reg. § 1.446-1T(e)(2)(iii), which specifically relates to changes based on a cost segregation study. On January 28, 2004, Chief Counsel Notice CC-2004-007 was issued, setting forth Chief Counsel’s Change in Litigating Position on the application of § 446(e) to changes in computing depreciation. It provides, in relevant part:
The correct procedure for a taxpayer to change its accounting method is the timely filing of Form 3115, Request for Change in Accounting Method. Pursuant to Revenue Procedure 2002-9, 2002-3 I.R.B. 327, a taxpayer may request automatic consent for the change. Revenue Procedure 2004-11 modifies Rev. Proc. 2002-9 and other revenue procedures to conform with § 1.446-1T(e)(2)(ii)(d) of the temporary Income Tax Regulations. Although Form 3115 is subject to National Office review, it is generally the responsibility of the examiner to verify the accuracy of the § 481(a) adjustment at the time of the examination. A Schedule M-1 adjustment may also be an indication of the taxpayer's change in accounting method. The examiner should evaluate the need to review the study that formed the basis for the depreciation recomputations and the resultant change in accounting method.
If the years the assets were placed in service end before December 30, 2003, and are still open under statute, taxpayers may file amended returns to correct the depreciation deductions for those years. They may also file a Form 3115 as a "protective" measure. In either case, the issue would generally warrant examination.
Table 1 to this appendix provides a listing of revenue procedures that are most frequently used by taxpayers to implement accounting method changes based on cost segregation studies. Taxpayers generally argue that they are simply reclassifying property placed in service in prior years to "correct" class lives. This results in recovery period, depreciation method, and convention changes. The following is a list of the more common compliance issues involving accounting method changes.
It is the position of the Service that a change in recovery period is a change in accounting method. Accordingly, a taxpayer is required to obtain the consent of the Commissioner by filing a timely Form 3115. However, the issue regarding a change in accounting method with respect to the recomputation of depreciation (e.g., those based on cost segregation studies) is quite complex. Examiners should consult Notice CC-2004-007 (January 28, 2004) and Treas. Reg. § 1.446-1T(e), and contact the Change in Accounting Method Technical Advisors for ongoing developments in this area. Examiners should also contact Change in Accounting Method Technical Advisor Philip Whitworth for assistance regarding ongoing developments in this area, as well as determining the taxpayer's compliance with the proper procedures for changing the accounting method and computing the adjustment pursuant to IRC § 481(a). Contact: Philip Whitworth (330) 253-7346 Philip.J.Whitworth@irs.gov
1996 & Prior Non-automatic; generally used when automatic change was not available
Automatic; limited to not enough depreciation claimed by using an improper method of depreciation; one-year reporting of taxpayer favorable section 481(a)
Non-automatic; generally used when automatic change was not available; four-year reporting of taxpayer favorable or unfavorable section 481(a)
Automatic; limited to not enough depreciation claimed by using an improper method of depreciation ; compliance with section 2 of the Appendix necessary; four-year reporting of taxpayer favorable or unfavorable section 481(a)
* Transition rules for 1997
Automatic; Available if not enough or too much depreciation was claimed by using an improper method of depreciation; compliance with section 2 of the Appendix necessary; four-year reporting of taxpayer favorable or unfavorable section 481(a)
* Transition rules for 1998
2002-9*
*modified by RP 2002-19 and
RP 2004-11
2001 & subsequent
Automatic; available if not enough or too much depreciation was claimed by using an improper method of depreciation; compliance with section 2 of the Appendix necessary; one-year reporting of taxpayer favorable section 481(a) & four-year reporting of Service favorable section 481(a) adjustment
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