Rev. Proc. 74-11

Section 1. Purpose.

.01 The purpose of this Revenue Procedure is to update Rev. Proc. 67-40, 1967-2 C.B. 674, as amplified by Rev. Proc. 68-26, 1968-2 C.B. 911 and Rev. Proc. 69-29, 1969-2 C.B. 311, which provides an administrative procedure whereby taxpayers may expeditiously obtain consent to change their methods of depreciation accounting to certain other methods for Federal income tax purposes.

.02 The changes in method of accounting described in Rev. Rul. 70-165, 1970-1 C.B. 43, and Rev. Rul. 70-166, 1970-1 C.B. 44, are consolidated in this Revenue Procedure. Also, section 7 of this Revenue Procedure includes additional situations of taxpayers not covered by Rev. Proc. 67-40, Rev. Proc. 68-26, and Rev. Proc. 69-29, and changes the 90-day period for timely filing of an Application for Change in Accounting Method to 180 days in accordance with section 1.446-1(e)(3) of the Income Tax Regulations. Taxpayers complying with the provisions hereof will be deemed to have obtained the consent of the Commissioner of Internal Revenue to change their methods of depreciation accounting.

Sec. 2. Background.

A taxpayer, before changing his method of depreciation accounting for Federal income tax purposes, generally is required to obtain the consent of the Commissioner under the provisions of section 1.446-1(e)(3) of the regulations and is required to file an application on Form 3115, Application for Change in Accounting Method, with the Commissioner within the first 180 days of the taxable year in which the change is to become effective.

Sec. 3. Application.

.01 Subject to the following conditions a taxpayer desiring to change his method of depreciation accounting set forth in section 4 of this Revenue Procedure may do so by filing an application on Form 3115 with the Director of the Internal Revenue Service Center where the return will be filed. Reference to this Revenue Procedure should be made a part of his application. The application shall be filed within the first 180 days of the taxable year in which the change is to become effective and shall include the following information with respect to the property which is the subject of the change:

(a) Date of acquisition;

(b) Whether or not the "original use" (the first use to which the property is put) of the property commenced with the taxpayer;

(c) General description of the location of the involved property (sufficient to identify and distinguish properties involved in the change from the properties of the taxpayer, if any, not involved in the change);

(d) Type or character of the property;

(e) Cost or other basis of the depreciable property and adjustments thereto, other than depreciation;

(f) Amounts recovered through depreciation and other allowances;

(g) Estimated salvage value; and

(h) Estimated remaining useful life of property to the taxpayer.

.02 Unless a letter is received by the taxpayer from the Director of the Internal Revenue Service Center denying permission because the Form 3115 is not timely filed, it may be assumed that the change has been granted provided the taxpayer has complied with all of the provisions of this Revenue Procedure.

.03 The application of the terms and conditions of this Revenue Procedure as well as the computations resulting from the change, are subject to verification by the District Director upon examination of the taxpayer's Federal income tax return.

Sec. 4. Changes in Method Covered by this Revenue Procedure.

.01 The following changes in method of depreciation are covered by this Revenue Procedure. Taxpayers desiring to change their methods of depreciation accounting under circumstances other than those following must follow the procedures outlined in section 7.05, below:

(a) From the straight line method to the sum of years-digits, sinking fund, unit-of-production, or declining balance method using any proper percentage of the straight line rate.

(b) From the declining balance method using any percentage of the straight line rate to the sum of years-digits method or the sinking fund method.

(c) From the sum of years-digits method to the sinking fund method, to the declining balance method using any proper percentage of the straight line rate, or to the straight line method.

(d) From the unit-of-production method to the straight line method.

(e) From the sinking fund method to the straight line method, unit-of-production method, sum of years-digits method, or declining balance method using any proper percentage of the straight line rate.

(f) From the declining balance method using any percentage of the straight line rate to the declining balance method using a different proper percentage of the straight line rate or any change in the interest factor used in connection with a compound interest or sinking fund method.

(g) Any change in the treatment of salvage proceeds from retirement of assets as set forth in section 1.167(a)-8(e)(2) of the regulations. Such a change may be made under this Revenue Procedure only if the change is applied to all items in the account for which the change is being made.

(h) Any change in averaging convention as set forth in section 1.167(a)-10(b) of the regulations. However, as specifically provided in section 1.167(a)-10(b) of the regulations, in any year in which an averaging convention substantially distorts the depreciation allowance for the taxable year, it may not be used. See Rev. Rul. 73-202, 1973-1 C.B. 81.

(i) From the practice of crediting the depreciation reserve with the salvage proceeds realized on normal retirement sales to the practice of computing and recognizing gains and losses on such sales. See Rev. Rul. 70-165.

(j) From the practice of crediting ordinary income (including the combination method of crediting the depreciation reserve with estimated salvage value, or actual salvage proceeds if less, with any excess of salvage proceeds over estimated salvage value credited to ordinary income) with the salvage proceeds realized on normal retirement sales, to the practice of computing and recognizing gains and losses on such sales. See Rev. Rul. 70-166.

(k) From item accounting for specific assets to multiple asset accounting for the same assets or vice versa.

Sec. 5. Conditions for Effecting the Change.

The following conditions must be adhered to, where appropriate, in order for the change to become effective:

.01 Any change from one method of depreciation to another method under this Revenue Procedure must result in a reasonable allowance for depreciation in accordance with the provisions, conditions, and limitations of section 167 of the Internal Revenue Code of 1954 and regulations thereunder.

.02 The basis for depreciation, as of the taxable year or period immediately preceding the taxable year of change, shall be the adjusted basis of the property determined under section 1016 of the Code and regulations thereunder.

.03 The rate of depreciation for property changed to the straight line or sum of years-digits method of depreciation shall be based on the remaining useful life of such property.

.04 For changes in method of depreciation to the declining balance method, the rate of depreciation applicable to the property shall be based on the useful life of such property from the date of acquisition, and not the expected remaining life from the date the change becomes effective.

.05 For changes in method of depreciation to the sum of years-digits or declining balance method, the property must meet the qualifications of sections 1.167(b)-0, 1.167(c)-1, or 1.167(j)-1 of the regulations, as appropriate.

.06 The effective year of change will be the taxable year or period within which the application for change is filed during the first 180 days in accordance with section 1.446-1(e)(3) of the regulations.

.07 The taxpayer must attach a copy of the application, Form 3115, to his income tax return filed for the taxable year of change.

Sec. 6. Factual Matters Subject to Review by District Director.

The following factors involved in depreciation computations are matters of fact and subject to review and verification by the District Director upon examination of the taxpayer's income tax return.

(a) Useful life

(b) Salvage value

(c) Adjusted basis

(d) Interest factors under the sinking fund method

(e) Estimated reserves under the unit-of-production method.

Sec. 7. Taxpayers Not Covered by this Revenue Procedure.

.01 This Revenue Procedure applies only to those changes in method of depreciation specifically covered in section 4 above.

.02 This Revenue Procedure does not apply to an account where a change in method of depreciation was made by a taxpayer to such account at any time within the ten taxable years immediately preceding the taxable year unless such change was made in applying the provisions of section 1.167(a)-12 of the regulations or such change was made previously in applying the provisions of Rev. Proc. 62-21, 1962-2 C.B. 418.

.03 This Revenue Procedure does not apply to depreciation allowance determinations made in accordance with section 1.167(a)-11 of the regulations relating to the Class Life Asset Depreciation Range System (ADR).

.04 This Revenue Procedure does not apply to depreciation allowance determinations under the authority of section 167(1) of the Code, relating to public utility property.

.05 For changes in method of depreciation to which this Revenue Procedure does not apply, other than changes expressly permitted or required under the Code and regulations provided procedures regarding those changes are expressly stated, permission of the Commissioner must be obtained by filing application on Form 3115 with the Commissioner of Internal Revenue, Attention T:I:E, Washington, D.C. 20224, within the first 180 days of the taxable year for which the change is desired.

Sec. 8. Records.

Taxpayers must maintain records so that the District Director may verify the necessary data concerning the proposed change in method of depreciation accounting.

Sec. 9. Compliance with Conditions.

Taxpayers making a change under this Revenue Procedure without complying with all the conditions herein will be deemed to have initiated the change in method of accounting without having obtained the consent of the Commissioner.

Sec. 10. Effective Date.

This Revenue Procedure shall be effective on January 7, 1974.

Sec. 11. Inquiries.

Inquiries in regard to this Revenue Procedure should refer to its number and be addressed to the Commissioner of Internal Revenue, Attention T:I:E, Washington, D.C. 20224.

Sec. 12. Effect on Other Documents.

This Revenue Procedure supersedes Rev. Proc. 67-40, Rev. Proc. 68-26, and Rev. Proc. 69-29.