Rev. Proc. 64-21

SECTION 1. PURPOSE.

The purpose of this Revenue Procedure is to provide a special procedure which may be adopted by electric and gas utility companies which have consistently maintained depreciation accounts on a composite basis and wish their returns to be examined under the provisions of Revenue Procedure 62-21, C.B. 1962-2, 418, Depreciation Guidelines and Rules, initially issued as IRS Publication 456, July 1962.

SEC. 2. BACKGROUND.

.01 The depreciation guidelines and rules set forth in Revenue Procedure 62-21 are intended to provide more objective rules in the administration of depreciation for tax purposes in order to permit and facilitate adoption of more rapid equipment replacement practices in keeping with current and prospective economic conditions.

.02 To aid in accomplishing this objective, a series of broad guideline classes was established to encompass large segments of machinery and equipment typically used in industry. Group One of Part I of Revenue Procedure 62-21 includes the guideline classes for depreciable assets used by business in general. Group Two sets forth the guideline classes for non-manufacturing activities, excluding transportation, communication, and public utilities. Group Three embodies the guideline classes for manufacturing activities, and Group Four includes the guideline classes for transportation, communications and public utilities.

.03 In the case of all taxpayers choosing to use Revenue Procedure 62-21, assets falling within the guideline classes in Group One should first be classified in the appropriate guideline classes contained in that Group. If the taxpayer is engaged in only one activity described in Group Two, Three, or Four, the remaining assets should be classified in the guideline class for that activity. If, however, the taxpayer is engaged in more than one activity, the assets used in each activity are required to be classified in the appropriate guideline class for that activity, except for assets used in an activity which is considered insubstantial for the purpose of applying Revenue Procedure 62-21. See Answer to Question 50, C.B. 1962-2, 477, for the definition of an `insubstantial activity.'

.04 It follows that if any multiple asset account maintained by the taxpayer overlaps two or more guideline classes, the taxpayer should have available sufficient information to determine with reasonable accuracy, considering the circumstances of the particular case, the portion of the depreciation reserve for that account which is attributable to assets falling within each guideline class.

.05 The activities of electric and gas utility companies are described in Guideline Classes 3 and 4 of Group Four and are as follows:

      "3. Electric Utilities

.07 Electric and gas utilities using a composite rate in computing their depreciation deductions have computed their tax depreciation reserves since March 1, 1913, on this same composite basis. Although there are some electric and gas utilities which have segregated plants into separate accounts for purposes of computing depreciation deductions, they have also, for the most part, always maintained a composite tax reserve for depreciation. As a result of the accounting practices and procedures described above, some electric and gas utility companies which are engaged in more than one activity under Guideline Class 3 or 4 of Group Four of Part I of Revenue Procedure 62-21, have considerable difficulty in segregating the composite reserve by activities. However, such utilities are generally able to segregate asset cost by activities.

SEC. 3. CONCLUSION.

.01 In order to facilitate the use of the depreciation guidelines and rules by electric and gas utility companies which desire to use them, and in view of the long history in these industries as a whole of using the composite basis, the following special procedure may be adopted under appropriate circumstances as indicated.

.02 Electric and gas utility companies which have, for Federal income tax purposes, consistently maintained depreciation reserve accounts on a composite basis, so that a single composite reserve has been maintained for more than one guideline class of assets as set forth in Group Four, may apply the depreciation guidelines and rules on a composite basis consistent with their records and prior practice, subject to the following conditions:

1. Assets and reserves falling within the guideline classes in Group One must be classified separately by appropriate guideline classes contained in that Group.

2. The single composite basis for the purpose of applying Revenue Procedure 62-21 to all activities falling within Guideline Class 3 of Group Four, Electric Utilities, or within Guideline Class 4 of Group Four, Gas Utilities, must be used consistently commencing with the first taxable year for which the taxpayer chooses to use Revenue Procedure 62-21. If the income tax return for such first taxable year, or a subsequent taxable year, was filed before the date of publication of this Revenue Procedure (May 11, 1964) on the basis of separate activities, the taxpayer may adopt the composite approach described herein either by filing an amended return or returns, by filing a claim for refund, by indicating an intention to adopt such approach when the original return or returns are examined by a revenue agent, or by filing a statement indicating such intention with the District Director of Internal Revenue with whom such return or returns were filed. Returns filed after publication of this Revenue Procedure should be filed in accordance with the use of the composite approach. If the company chooses to use the composite approach described herein, it may not change back to a "separate activity" approach at a later time. That is, although an electric or gas utility always has had, and continues to have, the option of having its depreciation deduction examined under other established procedures without regard to Revenue Procedure 62-21, such a utility may not shift in the future from the composite basis, as described herein, to a separate activity basis as long as it choose to be examined under Revenue Procedure 62-21.

3. If an electric or gas utility chooses to use the composite basis, such utility must use it for all purposes of Revenue Procedure 62-21, including the determination of class life and rate of growth, and the application of the reserve ratio test.

4. A substitute composite guideline life, computed under this Procedure, for assets falling within Group Four must be determined by weighting the guideline lives shown in Guideline Class 3, Electric Utilities, or Guideline Class 4, Gas Utilities, of Group Four, for the total basis of all assets in each Subclass (a), (b), (c), and (d). This substitute composite guideline life must be established for the first year for which this Revenue Procedure is adopted and may not be changed until such time as major variations in the asset mix justify some other substitute composite guideline life. As simplified example of the computation of the composite guideline life, under this Procedure, for an electric utility is set forth below. This example can also be used as a guide by a gas utility.

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SEC. 4. EFFECT ON OTHER DOCUMENTS.

This Revenue Procedure amplifies Revenue Procedure 62-21, C.B. 1962-2, 418, and modifies the Answer to Question 54, C.B. 1962-2, at page 479.

¹ Also released as Technical Information Release 580, dated April 24, 1964.