Rev. Rul. 74-154

Advice has been requested whether, under the circumstances described below, a taxpayer may retroactively change the method of depreciation that was used in computing the depreciation deduction of an asset on the original filed Federal income tax return.

In 1970, the taxpayer acquired and first placed in service a newly constructed shopping center complex, estimating its useful life to be 20 years. A footnote was included on the depreciation schedule of the Federal income tax return filed for that year to the effect that current year additions of assets having a useful life of 25 years or less would be depreciated by the straight line method and assets having a useful life in excess of 25 years would be depreciated by a declining balance method. Based on an estimated useful life of 20 years, the taxpayer adopted the straight line method of depreciation for the shopping center. During 1972, in connection with the audit of the taxpayer's Federal income tax return for 1970, the estimated useful life of the shopping center when placed in service was determined to be in excess of 25 years. The taxpayer then requested that he be allowed to recompute depreciation of the asset using a declining balance method beginning with 1970, the year in which the shopping center was first placed in service.

Section 167(a) of the Internal Revenue Code of 1954 provides that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear, and obsolescence of property used in a trade or business or held for the production of income.

Section 1.167(b)-0(c) of the Income Tax Regulations provides, in part, that in the case of item accounts, any method of depreciation that results in a reasonable allowance may be selected for each item, but such method thereafter must be applied consistently to that particular item.

Section 1.167(e)-1(a) of the regulations provides, in part, that any change in method of computing depreciation allowances with respect to a particular account is a change in method of accounting under section 446 of the Code. Such change will be permitted only with the consent of the Commissioner of Internal Revenue, with certain exceptions not pertinent to the instant case.

Section 1.446-1(e)(3) of the regulations provides, in part, that in order to secure the consent of the Commissioner for a change in method of accounting, Form 3115 must be filed with the Commissioner within 180 days after the beginning of the taxable year in which it is desired to make the change.

In M. Pauline Casey, 38 T.C. 357, 386, acq., 1963-2 C.B. 4, the court stated, in part, as follows:

* * * If taxpayers were permitted, at will, and without such consent, to change their method of taking depreciation every time a change in basis or estimated useful life was determined, administrative problems would vastly increase. We have no doubt that the provisions of the Code and regulations denying taxpayers, the right to make changes in method without respondent's consent reflect at least in part an effort on the part of Congress and the Secretary to lessen administrative burden. We think this view is particularly applicable to efforts to make retroactive changes.

Moreover, in Clinton H. Mitchell, 42 T.C. 953, acq., 1965-2 C.B. 6, the court held that a taxpayer who adopted an acceptable method of depreciation on his original return was not entitled in a later taxable year to retroactively change such method of depreciation, notwithstanding a written note on the original return that attempted to reserve the right to alter the claimed depreciation.

Rev. Rul. 72-491, 1972-2 C.B. 104; Silver Queen Motel, 55 T.C. 1101 (1971), acq., 1972-2 C.B. 3; and Robert M. Foley, 56 T.C. 765 (1971), acq., 1972-2 C.B. 2, each involved a situation in which a taxpayer had originally used an erroneous method of depreciation. In each instance it was determined that the taxpayer could adopt any proper method of depreciation without the consent of the Commissioner. However, in the Foley case, the taxpayer was required to obtain the consent of the Commissioner to change methods of depreciation with respect to those assets for which he had selected an acceptable method of depreciation.

In the instant case, the straight line method of depreciation adopted by the taxpayer was an acceptable method of depreciation and, in accordance with section 1.167(b)-0(c) of the regulations, such method thereafter must be applied consistently to that asset unless the consent of the Commissioner is obtained to change methods of depreciation. Furthermore, in accordance with section 1.446-1(e)(3) of the regulations, any authorized change is effective beginning with the taxable year during which the consent of the Commissioner is requested.

Accordingly, the taxpayer, in the instant case, may not retroactively change the method of depreciation used in computing the depreciation deduction of an asset on the original filed Federal income tax return.