Opinion ID: 29928
Heading Depth: 2
Heading Rank: 2

Heading: Agreement with the Reasoning of the Tax Court

Text: 12 After quoting IRC § 446(e) and the pertinent portions of the applicable Treasury Regulations, the Tax Court noted that a change in accounting method 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. 5 The Tax Court also noted that a material item is any item which involves the proper time for the inclusion of the item in income or the taking of a deduction. 6 Without deciding whether Brookshire's shift from non-residential real property to 15-year property for purposes of depreciation of the gas station properties constituted a change in accounting method for purposes of IRC § 446, the Tax Court observed that express exclusions are set forth in the regulations for specific types of adjustments that are not to be characterized as changes in accounting method. The court cited two relevant statements from Treas. Reg. 1.446-1(e)(2)(ii)( b ): 13 [A] change in method of accounting does not include adjustment of any item of income or deduction which does not involve the proper time for the inclusion of the item of income or the taking of a deduction. 14 ... 15 In addition, a change in the method of accounting does not include ... an adjustment in the useful life of a depreciable asset. 7 16 The Tax Court began its detailed analysis by quoting its long-standing position that [w]hen an accounting practice merely postpones the reporting of income, rather than permanently avoiding the reporting of income over the taxpayer's lifetime, it involves the proper time for reporting income. 8 The court observed that Brookshire neither altered its overall plan of accounting for income and deductions on an accrual basis nor changed its basic system of accounting for depreciation under MACRS. The change from straight line deduction of depreciation over a 31.5 or 39 year period to the declining balance method over a 15-year period, however, impressed the Tax Court as involving the timing of deductions rather than the total amount of lifetime income. At first glance, this appeared to be a material difference and thus potentially a change in accounting method. According to the court, however, this putative change is subject to the exception earlier noted that an adjustment in the useful life of a depreciable asset does not constitute a change in the taxpayer's method of accounting, regardless of the fact that these kinds of adjustments may involve the time for taking such deductions. 9 17 For the Tax Court, Brookshire's change within MACRS from the lengthy straight line approach to the shorter declining balance approach cannot constitute a material alteration for purposes of IRC § 446(e) if that change properly falls under the useful life exception of the regulations. The Commissioner insists that useful life is an obsolescent term of art that did not survive adoption of MACRS. The implication of the Commissioner's argument is that the useful life exception died with the adoption of ACRS, as amended by MACRS, so that — absent a new regulation applying the concept to the arbitrary 10 times available for depreciation deductions — there is no basis of excepting a change like Brookshire's by analogy to useful life. 18 The Tax Court perceived the useful-life analogy as being apposite to the instant situation and saw no distinguishing difference for purposes of applying the useful-life exception here. It did, however, find somewhat troubling the linkage of recovery period and depreciation method under MACRS, as there had been no such linkage under the prior, useful-life system. 11 19 The Tax Court discerned a dilemma arising from, on the one hand, the analogy between the years for depreciating assets under MACRS and the old useful-life system, and, on the other hand, the MACRS linkage of depreciation method and period of recovery. The court nevertheless concluded that analogizing the treatment of useful life as an exception pursuant to the never-repealed, pre-MACRS regulation better accords with the overall regulatory scheme of the Tax Code and regulations than would the denial of the exception on the slender reed of that apparent linkage. 20 Even though we perceive no such dilemma, we fully agree with the Tax Court that the applicable regulations were meant to allow taxpayers to make temporal changes in their depreciation schedules without prior consent of the Commissioner. Clearly, doing so would produce changes in the length of time over which deductions are taken as well as concomitant changes in the amount of the deduction for any given tax year — and such a change under MACRS would produce exactly the same results. It follows that we also agree with the Tax Court's resolution of its perceived dilemma by holding 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 does not equate with a change in the taxpayer's method of accounting for purposes of IRC § 446. And, absent such a change, consent of the Commissioner was not required. We affirm the judgment of the Tax Court for the reasons given in its Memorandum Opinion. 12 21