CCA 200033012: depreciation method elections for five year property

Plain-English summary

An equipment leasing company used different depreciation methods for property placed in service over six tax years. The IRS advised that its straight-line elections for five year property in Years 2 and 4 were irrevocable because it clearly selected that allowable method on Form 4562 for each year. It could use the 200 percent declining balance method for five year property in Years 3, 5, and 6 because its forms clearly selected that method. It could also use that method for Year 1 after the IRS disallowed the improper methods initially used for some property. The advice explains how a return's method choice can bind all property in the same class placed in service that year under section 168(b)(5).

Ruling snapshot

• Question: Could the company change its depreciation method for five year property placed in service in Years 1 through 6?
• Outcome: Advice given. Straight-line elections for Years 2 and 4 were irrevocable; 200 percent declining balance was available for Years 1, 3, 5, and 6.
• Key authorities: IRC §§ 167(a), 168(b)(5), and 168(e); Treas. Reg. § 301.9100-7T(a); Rev. Rul. 72-491.

Full text (IRS public release)

                            DEPARTMENT OF THE TREASURY
                               I N T E R N AL R E V E N U E S E R V I C E
                                    WASHINGTON, D.C. 20224
                                       May 12, 2000


Number: 200033012
Release Date: 8/18/2000
CC:DOM:FS:P&SI
TL-N-7065-99
UILC: 168.17-00
      168.23-00

  INTERNAL REVENUE SERVICE NATIONAL OFFICE FIELD SERVICE ADVICE

MEMORANDUM FOR DISTRICT COUNSEL

FROM:                 ASSISTANT CHIEF COUNSEL (FIELD SERVICE)
                      CC:DOM:FS

SUBJECT:              Revocability of Election of Depreciation Methods


This Field Service Advice responds to your memorandum dated February 9, 2000.
Field Service Advice is not binding on Examination or Appeals and is not a final
case determination. This document is not to be cited as precedent.

LEGEND:

Taxpayer                                           =
Year 1                                             =
Year 2                                             =
Year 3                                             =
Year 4                                             =
Year 5                                             =
Year 6                                             =

ISSUE:

Whether Taxpayer made an irrevocable election under section 168 to use the
straight-line or 150-percent declining balance method of depreciation rather than
the 200-percent declining balance method of depreciation for 5-year property
placed in service in Years 1 through 6.

CONCLUSIONS:

Taxpayer made an irrevocable election under section 168 to use the straight-line
method of depreciation for 5-year property placed in service in Years 2 and 4, since
                                           2


Taxpayer clearly indicated its choice of the allowable straight-line method for all its
5-year property on its Form 4562. Taxpayer may use the 200-percent declining
balance method of depreciation for 5-year property placed in service in Years 3, 5,
and 6, since Taxpayer clearly indicated its choice of the allowable 200-percent
declining balance method for all of its 5-year property on its Form 4562. Taxpayer
may also use the 200-percent declining balance method for 5-year property placed
in service in Year 1 under Rev. Rul. 72-491, 1972-2 C.B. 104, which holds that
where the Service disallows the use of any improper depreciation method for the
first taxable year of attempted use, the taxpayer may adopt any depreciation
method that would have been permissible had it been initially adopted.

FACTS

Taxpayer is in the business of leasing equipment. For book and tax purposes,
Taxpayer accounts for certain leases as sales type leases and other leases as
operating leases. Taxpayer retains title under the operating leases and the
property reverts to it on termination of the leases.

From Year 1 through 3, Taxpayer was an S Corporation, reporting income from the
operating leases as rental income and claiming depreciation deductions on Forms
1120S. For Years 4 through 6, Taxpayer was a C Corporation, reporting income
from the operating leases and claiming depreciation deductions on Forms 1120.
For each of the years 1 through 6, Taxpayer included Forms 4562, Depreciation
and Amortization (Including Information on Listed Property) with its federal income
tax returns, but did not include itemized depreciation schedules at the time when
the returns were filed.

Taxpayer’s Form 4562 for Year 1 reported a certain number of assets placed in
service during Year 1, in Part V, Listed Property, on the line for Property used more
than 50 percent in a qualified business use. All these assets were listed with a
three year recovery period and a half year convention. The 200-percent declining
balance method of depreciation was listed for most of the assets and the straight-
line method was listed for the others.

Taxpayer’s Form 4562 for Year 2 reported a certain dollar amount total of
unidentified properties placed in service during Year 2 at Part II, MACRS
Depreciation For Assets Placed in Service Only During Your Year 2 Tax Year,
under the classification of 3-year property, with a three year recovery period, half
year convention, and straight-line method of depreciation. Taxpayer’s Form 4562
for Year 2 also reported a certain other dollar amount total of unidentified properties
placed in service during Year 2 at Part II under the classification of 5-year property,
with a five year recovery period, half year convention, and straight-line method of
depreciation.
                                           3


Taxpayer’s Form 4562 for Year 3 reported a certain dollar amount total of
unidentified properties placed in service during Year 3 at Part II, MACRS
Depreciation For Assets Placed in Service Only During Your Year 3 Tax Year,
under the classification of 3-year property, with a 2.9 year recovery period, half year
convention, and 150-percent declining balance method of depreciation. Taxpayer’s
Form 4562 for Year 3 also reported a certain other dollar amount total of
unidentified properties placed in service during Year 3 at Part II under the
classification of 5-year property, with a five year recovery period, mid-quarter
convention, and 200-percent declining balance method of depreciation.

Taxpayer’s Form 4562 for Year 4 reported all of its assets placed in service during
Year 4 at Part II, MACRS Depreciation For Assets Placed in Service Only During
Your Year 4 Tax Year, under the classification of 5-year property, with a five year
recovery period, half year convention, and straight-line method of depreciation.

Taxpayer’s Form 4562 for Year 5 reported a certain dollar amount total of
unidentified properties placed in service during Year 5 at Part II, MACRS
Depreciation For Assets Placed in Service Only During Your Year 5 Tax Year,
under the classification of 3-year property with a 2.8 year recovery period, half year
convention, and 200-percent declining balance method of depreciation. Taxpayer’s
Form 4562 for Year 5 also reported a certain other dollar amount total of
unidentified properties placed in service during Year 5 at Part II under the
classification of 5-year property, with a five year recovery period, half year
convention, and 200-percent declining balance method of depreciation.

Taxpayer’s Form 4562 for Year 6 reported a certain dollar amount total of
unidentified properties placed in service during Year 6 at Part II, MACRS
Depreciation For Assets Placed in Service Only During Your Year 6 Tax Year,
under the classification of 5-year property, with a five year recovery period, half
year convention, and 200-percent declining balance method of depreciation.
Taxpayer’s Form 4562 for Year 6 also reported a certain other dollar amount total
of unidentified properties placed in service during Year 6 at Part II under the
classification of 7-year property, with a seven year recovery period, half year
convention, and 200-percent declining balance method of depreciation. Further,
Taxpayer’s Form 4562 for Year 6 reported an additional dollar amount total of
properties at Part III, Other Depreciation, on the line for ACRS and other
depreciation. Taxpayer produced schedules indicating that the properties had been
placed in service during Year 6, with recovery periods ranging from 1.8 to seven
years and straight-line method of depreciation.

For none of the Years 1 through 6 did Taxpayer make an entry on its Forms 4562,
Part III, on the line for Property subject to the section 168(f)(1) election. For Years
1 through 6, all the entries at Part II, dealing with MACRS depreciation for assets
placed in service during the current year, were made in the portion of Part II
                                            4


concerning the General Depreciation System rather than the portion dealing with
the Alternative Depreciation System.

Taxpayer maintains that it uses a production of income methodology and that its
recovery periods approximate the terms of the underlying leases. None of the
property leased by Taxpayer is qualified rent-to-own property. Much of the leased
property is manufacturing and technological equipment.

Taxpayer is prepared to concede that a MACRS recovery period of 5 years is
appropriate for all the assets for which a shorter period was used. However,
Taxpayer proposes that it be allowed to use the 200-percent declining balance
method of depreciation for all assets placed in service during Year 1, Year 4, and
Year 6.

LAW AND ANALYSIS

Section 167(a) allows as a depreciation deduction a reasonable allowance for the
exhaustion, wear and tear of property used in the trade or business or held for the
production of income. Section 168(a) states that except as otherwise provided, the
depreciation deduction of section 167(a) for any tangible property shall be
determined by using the applicable depreciation method, the applicable recovery
period, and the applicable convention.

Section 168(b) prescribes depreciation methods for purposes of the general
depreciation system of section 168(a). Section 168(b)(1) states that except as
provided in section 168(b)(2) and section 168(b)(3), the applicable method is the
200-percent declining balance method switching to the straight-line method for the
first taxable year for which using the straight-line method with respect to the
adjusted basis as of the beginning of the year will yield a larger amount. Section
168(b)(2)(A) and (B) provide that the 150-percent declining balance method applies
to certain specified types of property not here relevant. Section 168(b)(2)(C)
provides that the 150-percent declining balance method applies to any property not
described in section 168(b)(3) with respect to which the taxpayer makes an election
under section 168(b)(5). Section 168(b)(3)(A), (B), (C), (E), and (F) provide that the
straight-line method applies to certain types of property not here relevant. Section
168(b)(3)(D) provides that the straight-line method applies to property with respect
to which the taxpayer makes an election under section 168(b)(5).

Section 168(b)(5) provides that an election under section 168(b)(2)(C) or (3)(D)
may be made with respect to one or more classes of property for any taxable year
and once made with respect to any class shall apply to all property in such class
placed in service during such taxable year. Such an election, once made, shall be
irrevocable. Section 168(e)(1), dealing with classification of property, provides that
property will be treated as “3-year property” if it has a class life of four or less years
and as “5-year property” if it has a class life of more than four or less than ten
                                              5


years.1 Section 168(e)(3)(A) provides that the term “3-year property” includes
certain horses and any qualified rent-to-own property. Section 168(e)(3)(B)
provides that the term “5-year property” includes, among other things, any
semi-conductor manufacturing equipment and any qualified technological
equipment as defined in section 168(i)(2).

Section 168(f) provides that section 168 does not apply to any property if the
taxpayer elects to exclude such property from the application of section 168, and
for the first taxable year for which a depreciation deduction would be allowable with
respect to such property in the hands of the taxpayer, the property is properly
depreciable under the unit-of-production method or any method of depreciation not
expressed in a term of years (other than the retirement-replacement-betterment
method or similar method).

Temp. Treas. Reg. § 301.9100-7T(a)(1) provides rules for the time and manner of
making elections pursuant to sections 168(b)(5) and (f)(1). Treas. Reg.
§ 301.9100-7T(a)(2) provides that the time for making such elections is the due
date, taking extensions into account, of the tax return for the first taxable year for
which election is to be effective. Treas. Reg. § 301.9100-7T(a)(3) states that
unless otherwise provided the elections of paragraph (a)(1) of Treas. Reg.
§ 301.9100-7T shall be made by attaching a statement to the tax return for the
taxable year for which the election is to be effective. Except as provided in the
return or its instructions, the statement shall identify the election, indicate the
section of the Code (or of the Tax Reform Act of 1986 for uncodified provisions)
under which the election is made, and specify, as applicable, the period for which
the election is being made and/or the property or other items to which the election
is to apply.

Pacific National Co. v. Welch, 304 U.S. 191 (1938), is often considered the bedrock
case dealing with the doctrine of elections. There, a taxpayer could have used the
installment method to report sales of property, but reported the income using the
deferred payment method on his return. After the time for filing the original return
had expired, the taxpayer filed an amended return seeking use of the installment
method. The taxpayer conceded that both methods were allowable. The Supreme
Court held that the taxpayer had made a binding election and reasoned that change
from one method to another would require recomputation and readjustment of tax
liability for subsequent years and impose burdensome uncertainties.


       1
        It should be noted that the term “class” as used in section 168(b)(5), concerning
elections with respect to any class of property, refers to the categories of property in the
left hand column of section 168(e)(1), where it is provided that property shall be treated
as 3-, 5-, 7-, 10-, 15-, or 20-year property, rather than to the “class life” categories in the
right hand column of section 168(e)(1) or to the “asset classes” in Rev. Proc. 87-56,
1987-2 C.B. 674.
                                           6


Riley Co. v. Commissioner, 311 U.S. 55 (1940), noted that allowing an untimely
election would permit a taxpayer to use hindsight to shift from one allowable
method of depletion to another in light of developments subsequent to its original
choice. “Oversight, poor judgement, ignorance of the law, misunderstanding of the
law, unawareness of the tax consequence of making an election, miscalculation,
and unexpected subsequent events have all been held insufficient to mitigate the
binding effect of elections made under a variety of provisions of the Code.” Estate
of Stamos v. Commissioner, 55 T.C. 468, 474 (1970). However, purely
mathematical errors in computation, as opposed to estimates and matters of
judgement, may be corrected. Pacific Mutual Life Insurance Co. v. Commissioner,
48 T.C. 118 (1967), rev’d on another issue, 413 F 2d 55 (1969).

In Silver Queen Motel v. Commissioner, 55 T.C. 1101 (1971), acq., 1972-2 C.B. 3,
the taxpayer elected to use the double-declining balance method of depreciation
with respect to used motel properties during 1966, the first year of the taxpayer’s
existence, and 1967. However, the double-declining balance method was
unavailable for used properties by virtue of former section 167(c). The taxpayer
then sought to use the otherwise allowable 150-percent declining balance method.
Respondent argued that having erroneously originally elected the double-declining
balance method, the taxpayer was now required to use the straight-line method
under Treas. Reg. § 1.167(b)-1(a), which provides that the straight-line method
shall be used in all cases where the taxpayer has not adopted a different
acceptable method. Because the Commissioner denied the erroneous double-
declining balance method in the first year in which the property was subject to
depreciation, the court allowed the taxpayer to correct its mistaken initial choice of
an impermissible depreciation method by adopting any permissible depreciation
method.

In Foley v. Commissioner, 56 T.C. 765 (1971), acq., 1972-2 C.B. 2, the taxpayer
acquired 18 items of used property in 1964. The taxpayer elected the double-
declining balance method of depreciation with respect to 16 of the items and the
straight-line method with respect to the other two on his 1964 income tax return.
Subsequently, the taxpayer’s bookkeeper discovered that the double-declining
balance method had erroneously been applied. Before the 1965 income tax return
was filed, an amended return for 1964 was filed seeking to employ the 150-percent
declining balance method with respect to all 18 items. The court followed Silver
Queen Motel, supra, and, therefore, allowed the taxpayer to adopt for 1964 the
150-percent declining balance method for the 16 items for which the taxpayer
initially elected an erroneous depreciation method. With respect to the 2 items for
which the taxpayer initially used the straight-line method, the court decided
adversely to the taxpayer because the straight-line method was an allowable
depreciation method and a change from that method to another allowable
depreciation method was a request for a change in method of accounting, which
required the consent of the Commissioner.
                                             7


Rev. Rul. 72-491, 1972-2 C.B. 104, revoked Rev. Ruls. 67-50, 1967-1 C.B. 60, and
67-338, 1967-2 C.B. 102. These rulings had held that when a taxpayer had
incorrectly claimed depreciation under the sum-of-the-year-digits or double-
declining balance methods for used property contrary to former section 167(c), the
taxpayer could not later claim use of the 150-percent declining balance method, but
must use the straight-line method, absent consent to change the taxpayer’s method
of accounting. These rulings were now revoked in light of Silver Queen Motel,
supra, and Foley, supra.

Accordingly, Rev. Rul. 72-491 states that it is now the position of the Service that
when a taxpayer has attempted to use an erroneous depreciation method: (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,
the taxpayer may adopt any depreciation method that would have been permissible
had it been initially adopted; and (2) if, as in Foley, the taxpayer filed his first return
using an improper depreciation method and, prior to the time the return for the
succeeding taxable year is filed, filed an amended return using a proper
depreciation method, the use the proper depreciation method is permissible without
obtaining the Commissioner’s consent.

Rev. Rul. 74-154, 1974-1 C.B. 59, concerned a taxpayer who put a footnote on the
depreciation schedule of his 1970 income tax return stating that current year
additions of assets with a useful life of 25 years or less would be depreciated under
the straight-line method and those with a life of over 25 years would be depreciated
under a declining balance method. On audit, a depreciable asset with an estimated
useful life of 20 years on the 1970 return was determined to have a useful life in
excess of 25 years. The taxpayer then requested use of a declining balance
method beginning with 1970. Rev. Rul. 74-154 holds that despite the footnote on
the taxpayer’s return, the taxpayer could not change the depreciation method
without the consent of the Commissioner because the straight-line method adopted
by the taxpayer was an allowable depreciation method.

Taxpayer in the present case is prepared to concede that five years is the proper
recovery period for all property for which it claimed a recovery period of less than
five years. Since section 168(c) provides that the applicable recovery period is five
years in the case of 5-year property, this is tantamount to a concession that the
property in issue is classified as “5-year property” under section 168(e). It also
appears that none of the property in question falls within the types of property
statutorily classified as “3-year property” under section 168(e)(3)(A).

The issue in this case is whether the taxpayer made an irrevocable election to use
the straight-line or 150-percent declining balance method of depreciation for its
assets placed in service during each of the years under consideration, precluding
use of the 200-percent declining balance method now sought on audit. Resolution
                                            8


of this question is to be done on a yearly basis, depending upon the particular facts
of each year.

For Year 1, Taxpayer’s Form 4562 reported all the assets placed in service in Year
1 as listed property in Part V. The 200-percent declining balance method of
depreciation was indicated for most of these assets with “200 DB” and the straight-
line method was indicated for the others with “S/L” at column (g). A three year
recovery period was indicated for all the assets and it is now agreed that all the
property constitutes 5-year property.

The Instructions for Form 4562 for Year 1, in the portion concerning MACRS
depreciation for assets placed in service only during the taxpayer’s Year 1, state
that the applicable depreciation method for 5-year property is the 200-percent
declining balance method, switching to the straight-line method in the first year that
maximizes the depreciation allowance. It is stated that the taxpayer may make an
irrevocable election to use the 150-percent declining balance method for one
or more classes of property, and that the taxpayer may also make an irrevocable
election to use the straight-line method for all property within a classification that is
placed in service during the tax year. The taxpayer is to enter “200 DB,” “150 DB,”
or “S/L” in column (f) of Part II of the Form 4562, the part of the return dealing with
MACRS property except listed property. With regard to Part V of the Form 4562,
the part dealing with listed property, the instructions for Form 4562 do not contain a
specific discussion of the election process, but state that the taxpayer is to write
“200 DB,” “150 DB,” or “S/L” for the depreciation method in column (g) of Part V.

Thus, Taxpayer used the 200-percent declining balance method for most of the now
concededly 5-year property in question placed in service during Year 1 and the
straight-line method for the others. Section 168(b)(1) provides that the applicable
method is the 200-percent declining balance method except as provided in section
168(b)(2), i.e., the 150-percent declining balance method, and section 168(b)(3),
i.e., the straight-line method. Section 168(b)(5) provides that an election under
section 168(b)(2)(C) or (3)(D) once made with respect to any class shall apply to all
property in such class placed in service during such taxable year and, once made,
shall be irrevocable. Consequently, unless the property at issue is subject to
section 168(g)(1)-(6), all 5-year property placed in service in the same taxable year
must be depreciated under section 168 by using the same depreciation method.

Rev. Rul. 72-491, supra, states that if the Service disallows the use of an improper
depreciation method for the first taxable year for which its use is attempted, the
taxpayer may adopt any depreciation method which would have been permissible
had it been initially adopted. The Service has disallowed Taxpayer’s present
method in the property’s placed in service years and Taxpayer’s use of different
depreciation methods for its 5-year property placed in service in Year 1, none of
which is subject to section 168(g)(1)-(6), is improper. Taxpayer now seeks the 200-
percent declining balance method for all of its 5-year property, none of which is
                                           9


subject to section 168(g)(1)-(6). Not only is this a depreciation method which would
have been initially proper for 5-year property, the 200-percent declining balance
method is the default method applicable for 5-year property if no election to use
another depreciation method has been made under section 168. Accordingly, use
of the 200-percent declining balance method for all of Taxpayer’s 5-year property
placed in service in Year 1 is now allowable.

For Year 2, Taxpayer’s Form 4562 reported all of the assets placed in service
during Year 2 in Part II, MACRS depreciation. Though some of those assets were
reported incorrectly with a three year recovery period and some allowably with a
five year recovery period, the straight-line method was indicated for all with “S/L” in
Column (f). The Instructions for Form 4562 for Year 2 are substantially similar to
those for Year 1.

Thus, Taxpayer clearly made an allowable irrevocable election of the straight-line
method for all of the now concededly 5-year property placed in service during Year
2, and the requirement of section 168(b)(5) that the election apply to all the
property in the class is satisfied. The election is valid. In Year 2, Taxpayer placed
in service 5-year property other than the items in question. For these correctly
classified 5-year property, Taxpayer clearly elected the straight-line method and
consistently applied it to all such property. Although some of the now concededly
5-year property was incorrectly reported as 3-year property, Taxpayer used the
straight-line method for them as it did for those items correctly classified as 5-year
property. To allow Taxpayer the use of the 200-percent declining balance method
in these circumstances would permit the use of hindsight in violation of the doctrine
of binding election as elucidated by Pacific National Co., supra, and Riley Co.,
supra. Taxpayer is required to use the straight-line method for all of its 5-year
property placed in service in Year 2, which it irrevocably elected.

For Year 3, Taxpayer’s Form 4562 reported all of the assets placed in service
during Year 3 in Part II, MACRS depreciation. Some of those assets were reported
incorrectly as 3-year property with a 2.9 year recovery period and with “150DB”
indicated in column (f). Other assets were reported allowably as 5-year property
with a five year recovery period and with “200 DB” at column (f). The Instructions
for Form 4562 for Year 3 are substantially similar to those for Year 1.

Thus, Taxpayer’s entry of “200DB” on its Form 4562 for assets correctly classified
as 5-year property and placed in service in Year 3 clearly indicates that Taxpayer
used the 200-percent declining balance method for any 5-year property placed in
service in Year 3. Because all 5-year property placed in service in the same
taxable year must use the same depreciation method (unless section 168(g)(1)-(6)
applies), Taxpayer must use the same depreciation method for all of its 5-year
property placed in service in Year 3, including depreciable property reclassified as
5-year property. None of the now concededly 5-year property is subject to section
168(g)(1)-(6). Accordingly, Taxpayer’s initial choice of the 200-percent declining
                                          10


balance method for 5-year property placed in service in Year 3 also applies to the
now concededly 5-year property placed in service in the same year.

For Year 4, Taxpayer’s Form 4562 reported all of the assets placed in service
during Year 4 in Part II, MACRS depreciation. All of these assets were reported
correctly as 5-year property with a five year recovery period and with “S/L” in
column (f). Consequently, the straight-line method was indicated for this 5-year
property. The Instructions for Form 4562 for Year 4 are substantially similar to
those for Year 1.

Thus, Taxpayer clearly made an allowable irrevocable election of the straight-line
method for all of the 5-year property placed in service during Year 4, and the
requirement of section 168(b)(5) that the election apply to all the property in the
class is satisfied. The election is valid. In Year 4, Taxpayer placed in service
5-year property other than the items in question. For these correctly classified 5-
year property, Taxpayer clearly elected the straight-line method and consistently
applied it to all such property. To allow Taxpayer the use of the 200-percent
declining balance method in these circumstances would permit the use of hindsight
in violation of the doctrine of binding election as elucidated by Pacific National Co.,
supra, and Riley Co., supra. Taxpayer is required to use the straight-line method
for all 5-year property placed in service in Year 4, which it irrevocably elected.

For Year 5, Taxpayer’s Form 4562 reported all of the assets placed in service
during Year 5 in Part II, MACRS depreciation. Though some of these were
reported incorrectly as 3-year property with a 2.8 year recovery period and some
allowably as 5-year property with a five year recovery period, the 200-percent
declining balance method was indicated for all with “200 DB” in column (f). The
Instructions for Form 4562 for Year 5 are substantially similar to those for Year 2.

Thus, Taxpayer’s entry of “200DB” on its Form 4562 for assets correctly classified
as 5-year property and placed in service in Year 5 clearly indicates that Taxpayer
used the 200-percent declining balance method for any 5-year property placed in
service in Year 5. Because all 5-year property placed in service in the same
taxable year must use the same depreciation method (unless section 168(g)(1)-(6)
applies), Taxpayer must use the same depreciation method for all of its 5-year
property placed in service in Year 5, including depreciable property reclassified as
5-year property. None of the now concededly 5-year property is subject to section
168(g)(1)-(6). Accordingly, Taxpayer’s initial choice of the 200-percent declining
balance method for 5-year property placed in service in Year 5 also applies to the
now concededly 5-year property placed in service in the same year.

For Year 6, Taxpayer’s Form 4562 reported some of the assets placed in service
during Year 6 in Part II, MACRS depreciation, in the section applicable to the
General Depreciation System and some of the assets placed in service during Year
6 in Part III, Other Depreciation. With respect to the assets reported in Part II,
                                          11


none of the assets were reported as 3-year property, some were reported as 5-year
property with a five year recovery period, and some were reported as 7-year
property with a seven year recovery period. The 200-percent declining balance
method was indicated for the 5-year property (as it was for the 7-year property) with
“200 DB” at column (f).

The assets placed in service during Year 6 which were reported in Part III were
reported on the line for “ACRS and other depreciation,” which contains a space only
for a total amount. Upon audit, Taxpayer provided a schedule indicating that the
items resulting in this amount had been placed in service during Year 6, with
recovery periods ranging from 1.8 to seven years, and it is now agreed that the
property was 5-year property. The straight-line method was indicated for each of
these items by “S/L.” The Instructions for Form 4562 for 1997 indicate that the line
for “ACRS and other depreciation” was not the proper place for 3-, 5-, or 7-year
property placed in service during Year 6.

Thus, Taxpayer’s entry of “200DB” in Part II of its Form 4562 for assets correctly
classified as 5-year property and placed in service in Year 6 clearly indicates that
Taxpayer used the 200-percent declining balance method for any 5-year property
placed in service in Year 6. Because all 5-year property placed in service in the
same taxable year must use the same depreciation method (unless section
168(g)(1)-(6) applies), Taxpayer must use the same depreciation method for all
5-year property placed in service in Year 6, including depreciable property
reclassified as 5-year property. None of the now concededly 5-year property is
subject to section 168(g)(1)-(6). Accordingly, Taxpayer’s initial choice of the
200-percent declining balance method for 5-year property placed in service in Year
6 also applies to the now concededly 5-year property placed in service in the same
year.

CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS

Only Years 2 and 4 remain in issue. For both these years, the straight-line method
was indicated for all the now concededly 5-year property by the entry of “S/L” on
the Forms 4562 at column (f) of Part II.

Treas. Reg. § 301.9100-7T(a)(3)(i) provides generally that the elections specified
therein (including the section 168(b)(5) election of the straight-line method of
depreciation) shall be made by attaching a statement to the return. No such
statements were attached to Taxpayer’s returns. It should therefore be made plain
that Treas. Reg. § 301.9100-7T(a)(3)(i) further provides that “(e)xcept as otherwise
provided in the return or in the instructions accompanying the return for the taxable
year,” the statement shall provide any information required by the relevant statutory
provisions. The Instructions for Form 4562 for Years 2 and 4 provide that the
taxpayer may make an irrevocable election to use the straight-line method for all
property within a classification placed in service during the taxable year by entering
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“S/L” in column (f) of Part Il, which Taxpayer did. It is clear that the provision of a
specific place for stating the election on the Form 4562 itself was to relieve the
need for providing such information by a separate statement.

Otherwise, there do not appear to be any litigating hazards. Taxpayer’s plain
election on its Forms 4562 for Years 2 and 4 of the statutorily irrevocable straight-
line method for all of the property in the classification clearly constitutes a binding
election under Pacific National Co. and its progeny.

Please call if you have any further questions.

                                        DEBORAH A. BUTLER
                                 By:    WILLIAM C. SABIN, JR.
                                        Senior Technician Reviewer
                                        Passthroughs & Special Industries Branch
                                        Field Service Division