Rev. Rul. 54-381

Advice is requested as to the basis of depreciable property held by a taxpayer which was formerly exempt from tax for a prior period and subsequently became subject to tax, for the purpose of computing the annual depreciation allowance for the taxpayer with respect to such property.

In the case of a taxable organization which was formerly exempt from tax G.C.M. 27491, C.B. 1952-2, 221, holds that in computing the amount of gain or loss from the sale or exchange of property held during all or part of the period that it was exempt, the basis should be reduced by the amount of depreciation sustained with respect to the property for the period during which the taxpayer was exempt.

Section 114(a) of the Internal Revenue Code of 1939 provides that the basis upon which depreciation is to be allowed in respect of any property shall be the adjusted basis provided in section 113(b) for the purpose of determining the gain upon the sale or other disposition of such property. Section 113(b)(1)(B) of such Code provides in effect that in determining the basis for gain or loss, proper adjustment shall be made for any period after February 28, 1913, for depreciation allowed or allowable, whichever is greater. Since the method of determining the basis for depreciation is the same as that for determining gain on the sale or exchange of depreciable property, the principles set forth in G.C.M. 27491, supra , would also be applicable to the situation here involved.

Accordingly, it is held that in computing the amount of annual depreciation to be allowed a taxpayer which was formerly exempt from tax for a prior period and subsequently became subject to tax, the basis of the taxpayer's depreciable property should be reduced by the amount of the depreciation sustained with respect to the property for the period held while the taxpayer was exempt from tax.

I.T. 4106, C.B. 1952-2, 130, provides that the provisions of G.C.M. 27491, supra , will be applicable only to sales occurring in taxable years beginning after December 31, 1950. Since, as indicated above, the principles set forth in G.C.M. 27491 are considered equally applicable in the instant case, pursuant to the authority contained in section 3791(b) of such Code, this ruling will likewise be applicable only with respect to the determination of tax liabilities for taxable years beginning after December 31, 1950.