Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 66-19

1966-1 C.B. 178

IRS Headnote

Determination of basis of depreciable assets held by a foreign corporation on the first day of its first taxable year beginning after December 31, 1962.

Full Text

Rev. Rul. 66-19 /1/

The Internal Revenue Service recognizes the need for clarification of the Income Tax Regulations under section 964(a) of the Internal Revenue Code of 1954 (relating to determination of the earnings and profits of a foreign corporation) insofar as such regulations require the determination of basis of depreciable assets held by a foreign corporation on the first day of its first taxable year beginning after December 31, 1962, in which such corporation is a controlled foreign corporation (within the meaning of section 957 of the Code) or for which it is included in a chain or group under section 963(c)(2)(B) or (3)(B) of the Code or has a deficit in earnings and profits sought to be taken into account under section 952(d) of the Code (hereinafter referred to as the corporation's first post-1962 taxable year).

Paragraph (b)(1)(ii) and (2) of section 1.964-1 of the regulations provides, in effect, that depreciation shall be based on historical cost of a physical asset determined on-

(1) The first day of the corporation's first taxable year beginning after December 31, 1949, if treatment under paragraph (b)(2)(ii) of section 1.964-1 of the regulations is elected by or on behalf of the corporation,

(2) The date the corporation acquired the asset, or

(3) The date the corporation became a majority-owned subsidiary if such event occurred after December 31, 1949, but before October 27, 1964, and if treatment under paragraph (b)(2)(i) of section 1.964-1 of the regulations is elected by or on behalf of the corporation,

whichever date is latest.

Paragraph (c) of section 1.964-1 of the regulations provides that depreciation shall be computed in accordance with section 167 of the Code and the regulations thereunder and that for its first post-1962 taxable year there may be adopted by or on behalf of a foreign corporation any method of accounting or election allowable under such section of the regulations notwithstanding that, in previous years, the corporation's earnings and profits were computed, or its financial statements prepared, in accordance with a different method and notwithstanding that such election is required by the Code or regulations to be made in prior year.

Thus, although the regulations provide guidelines for determining depreciation during a foreign corporation's first post-1962 taxable year and later years, the regulations do not provide rules for the determination of basis of depreciable assets as of the first day of the corporation's first post-1962 taxable year.

For purposes of computing depreciation during the period beginning on the date historical cost is determined and ending on the day before the first day of a foreign corporation's first post-1962 taxable year, the corporation (or its controlling United States shareholders on its behalf) may-

(1) Choose to continue using the method actually utilized by such corporation on its books of account regularly maintained for the purpose of accounting to its shareholders during such period if such method is sanctioned by section 167 of the Code and the regulations thereunder,

(2) Adopt the straight-line method of depreciation, as set forth in section 1.167(b)-1 of the regulations, or

(3) Adopt the same method of depreciation that the corporation adopts for its first post-1962 taxable year.

If the method described in paragraph (1) is not sanctioned by section 167 of the Code and the regulations thereunder, a method described in paragraph (2) or (3) must be adopted. If such a method is adopted, the controlling United States shareholders of the foreign corporation must comply with the procedures set forth in paragraph (c)(3)(ii) and (iii) of section 1.964-1 of the regulations, relating to notification of the Internal Revenue Service and noncontrolling United States shareholders of the action taken.

It should be noted that adoption of the straight-line method of depreciation in accordance with this Revenue Ruling does not preclude the adoption of a different method of depreciation for the first post-1962 taxable year and later years in accordance with paragraph (c) of section 1.964-1 of the regulations so long as such method is sanctioned by section 167 of the Code and the regulations thereunder.

It should also be noted that adoption of a method of depreciation for years prior to a foreign corporation's first post-1962 taxable year in accordance with this Revenue Ruling will not authorize the filing of amended returns for those years. However, if the foreign corporation utilized a method of depreciation for those years which is not sanctioned by section 167 of the Code and the regulations thereunder, the Service may require that appropriate adjustments be made for those years. See Revenue Ruling 63-6, C.B. 1963-1, 126. Moreover, if a method of depreciation is adopted, for purposes of calculating the basis of depreciable assets held on the first day of the corporation's first post-1962 taxable year, which is different from the method actually utilized by such corporation for years ending prior to that date, the Service may require that the method so adopted be utilized in calculating-

(1) Any deficit in earnings and profits of such corporation which is sought to be taken into account under section 952(c)(1)(B) of the Code, or

(2) The earnings and profits of such corporation from such prior years when a distribution (including a liquidating distribution) made on or after such first day has United States tax consequences,

to prevent any duplication or omission of amounts which would otherwise result from the adoption of such method.

Conforming amendments to the regulations will be made.

/1/ Based on Technical Information Release 752, dated July 28, 1965.