Rev. Rul. 72-491

The Internal Revenue Service has reconsidered the position set forth in Revenue Ruling 67-50, C.B. 1967-1, 60, and Revenue Ruling 67-338, C.B. 1967-2, 102, concerning the method of depreciation that a taxpayer may use when either the sum of the years-digits method or the double declining balance method of depreciation was initially used by the taxpayer in depreciating "used" depreciable assets.

The above-cited Revenue Rulings hold that whenever a taxpayer has erroneously attempted to depreciate "used' depreciable assets under an improper accelerated depreciation method, the only depreciation method the taxpayer may employ for all taxable years for which the periods of limitations have not expired, and for all subsequent taxable years, until a consent to change to another permissible depreciation method is obtained, is the straight line method provided in section 167(b)(1) of the Internal Revenue Code of 1954.

In Silver Queen Motel, 55 T.C. 1101 (1971) (acquiescence, page 3), the United States Tax Court held that when the taxpayer had erroneously attempted to use the double declining balance method of depreciation for "used" assets, and the Service disallowed such use for the first year for which the taxpayer attempted to use the improper method, then the taxpayer is permitted to "adopt" any permissible depreciation method, and is not limited to the use of the straight line method. Similarly, in Robert M. Foley, 56 T.C. 765 (1971) (acquiescence, page 2), the Tax Court held that when a taxpayer used an improper depreciation method (double declining balance) in the year of asset acquisition and, in an amended return for such taxable year, which was filed prior to filing the return for the succeeding taxable year, "adopted" a proper depreciation method (150 percent declining balance), such "adoption" invalidates the original election, and the taxpayer is permitted to adopt for the first year the 150 percent declining balance method.

In view of the decisions in Silver Queen Motel and Robert M. Foley, the Service has reconsidered the questions presented in Revenue Rulings 67-50 and 67-338. It is now the position of the Service that when a taxpayer has attempted to use an erroneous method of depreciation: (1) If, as in Silver Queen Motel, the Service disallows the use of an improper depreciation method for the first taxable year for which the taxpayer attempts to use the method and thereby prevents its adoption, the taxpayer may adopt the straight line method, or any other method of depreciation that would have been permissible had it been adopted initially by the taxpayer; (2) If, as in Robert M. Foley, the taxpayer filed his first return using an improper method of depreciation, and subsequently, but prior to the time the return for the succeeding taxable year is filed, files an amended return using a proper depreciation method, the use of the proper method is permissible without obtaining the consent of the Commissioner.

Compare Revenue Ruling 67-49, C.B. 1967-1, 59, which permits the use of an accelerated method of depreciation rather than the straight line method when the taxpayer had erroneously claimed amortization instead of depreciation.

Revenue Ruling 67-50 and Revenue Ruling 67-338 are hereby revoked.