Rev. Rul. 62-92

Advice has been requested whether the Internal Revenue Service will apply the decision of the United States Court of Appeals in the case of Bertrand W. Cohn, et al. , v. United States , 259 Fed.(2d) 371, (1958), to the extent that the deduction for depreciation of an asset used in a trade or business will be adjusted in the year of disposition of the asset if the amount received from disposition exceeds the adjusted basis of the asset as of the beginning of the taxable year.

In the Cohn case, which arose under the Internal Revenue Code of 1939, it was held that it is proper for the Commissioner of Internal Revenue, in computing the deduction for depreciation of an asset, to adjust salvage value at or near the end of the useful life of an asset where there is a difference between what was estimated and what salvage value as shown by actual sale proves to be.

The Service policy with respect to depreciation adjustments is set forth in Revenue Ruling 90, C.B. 1953-1, 43, wherein it is provided that depreciation deductions taken by taxpayers generally will not be disturbed and Service personnel will not propose adjustments to such deductions unless there is a clear and convincing basis for a change. Revenue Ruling 91, C.B. 1953-1, 44, furnished guidance in the application of Revenue Ruling 90.

In Revenue Procedure 57-18, C.B. 1957-1, 748, the Service, in clarifying Revenue Rulings 90 and 91, stated that if the facts in a case currently under examination furnish a clear and covincing basis for a depreciation adjustment, such adjustment will be made even though a deprciation deduction claimed in a previous return has been accepted without change upon examination.

Sections 1.167(a)-1(a), 1.167(a)-1(c), and 1.167(b)-0(a) of the Income Tax Regulations under the Internal Revenue Code of 1954 provide, in pertinent part, as follows:

1.167(a)-1(a). Section 167(a) provides that a reasonable allowance for the exhaustion, wear and tear, and obsolescence of property used in the trade or business or of property held by the taxpayer for the production of income shall be allowed as a depreciation deduction. The allowance is that amount which should be set aside for the taxable year in accordance with a reasonably consistent plan (not necessarily at a uniform rate), so that the aggregate of the amounts set aside, puls the salvage value, will, at the end of the estimated useful life of the depreciable property, equal the cost or other basis of the property as provided in section 167(f) and section 1.167(f)-1. An asset shall not be depreciated below a reasonable salvage value under any method of computing depreciation.

1.167(a)-1(c). Salvage value is the amount (determined at the time of acquisition) which is estimated will be realizable upon sale or other disposition of an asset when it is no longer useful in the taxpayer's trade or business or in the production of his income and is to be retired from service by the taxpayer. Salvage value shall not be changed at any time after the determination made at the time of acquisition merely because of changes in price levels. However, if there is a redetermination of useful life under the rules of paragraph (b) of this section, salvage value may be redetermined based upon facts known at the time of such redetermination of useful life. * * * Salvage value must be taken into account in determining the depreciation deduction either by a reduction of the amount subject to depreciation or by a reduction in the rate of depreciation, but in no event shall an asset (or an account) be depreciated below a reasonable salvage value.

1.167(b)-0(a). * * * Regardless of the method used in computing depreciation, deductions for depreciation shall not exceed such amounts as may be necessary to recover the unrecovered cost or other basis less salvage during the remaining useful life of the property. The reasonableness of any claim for depreciation shall be determined upon the basis of conditions known to exist at the end of the period for which the return is made.

The provision in section 1.167(a)-1(c) of the regulations to the effect that salvage value shall not be changed at any time after the determination made at the time of acquisition merely because of changes in price levels applies to assets still on hand. The provision does not preclude adjustment of salvage value where there is a clear and convincing basis therefor even though no adjustment of useful life is required. The purpose of the provision is to eliminate needless and endless controversies over depreciation allowances which at best are merely informed estimates of the cost of using the property in the taxpayer's business. That purposes has been served when the asset is disposed of and when a final transaction has occurred over which there can be no dispute or difference of opinion or judgment. These rules are and have always been applicable to the allowanced of the deduction for depreciation. See Massey Motors, Inc. v. United States and Commissioner v. Robley H. Evans et ux. , 364 U.S. 92 (1960), Ct. D. 1847, C.B. 1960-2, 445; and Hertz Corporation v. United States , 364 U.S. 122 (1960), Ct. D. 1848, C.B. 1960-2, 70.

Accordingly, it is the position of the Service that the Cohn case applies equally to the 1939 Code and the 1954 Code and that it is not only reasonable but proper to take the untimate facts into consideration in determining the depreciation deduction for the year of disposition of the asset. Therefore, the deduction for depreciation of an asset used in the trade or business or in the production of income shall be adjusted in the year of disposition so that the deduction, otherwise properly allowable for such year under the taxpayer's method of accounting for depreciation, is limited to the amount, if any, by which the adjusted basis of the property at the beginning of such year exceeds the amount realized from sale or exchange. See also section 1.167(a)-10 of the regulations for rules with respect to when depreciation is allowable.

Revenue Rulings 90 and 91, as clarified by Revenue Procedure 57-18, are, of course, applicable for taxable years prior to the year of disposition where there is a clear and convincing basis existing at the end of such prior taxable year for an adjustment in the depreciation deduction. See also section 1.167(b)-0(a) of the regulations.