Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 68-4

1968-1 C.B. 77

Sec. 167

IRS Headnote

For purposes of computing depreciation on depreciable real property, it is not proper to use the component method of computing depreciation by assigning the guideline class life from Revenue Procedure 62-21, C.B. 1962-2, 418, to the structural shell of a building and assign different useful lives to the other parts or components of the building.

Full Text

Rev. Rul. 68-4

Advice has been requested concerning the use of the component grouping method of computing depreciation for real property improvements under which the cost of the various components such as the structures of buildings, roofs, floors, wiring, plumbing, ceilings, centralized air conditioners and related equipment, and other items are segregated into separate accounts and depreciated by applying a separate appropriate useful life to each separate account. Specifically, the question arises whether it is proper in computing depreciation for real property improvements to use the guideline class life, under Revenue Procedure 62-21, C.B. 1962-2, 418, for the shell of a building and to assign different lives to the other components of the same building.

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

Depreciable property may be accounted for by treating each individual item as an account or by combining two or more assets in a single account. Assets may be grouped in an account in a variety of ways. Section 1.167(a)-7 of the Income Tax Regulations.

In the case of property new in use, the component grouping method of computing depreciation for real property improvements as described above is acceptable. Herbert Shainberg, et ux. , v. Commissioner , 33 T.C. 241 (1959), acquiescence, C.B. 1960-1, 5. However, in the case of the acquisition of used depreciable real property, the basis ordinarily cannot be realistically allocated into separate component accounts for which appropriate individual useful lives of the components may be applied in computing depreciation allowable. Thus, an overall useful life for the building must be determined on the basis of the building as a whole. Revenue Ruling 66-111, C.B. 1961-1, 46.

The determination of the useful life of each of the various components of real property is a factual matter dependent upon the period over which the particular component may reasonably be expected to be useful to the taxpayer in his trade or business or in the production of his income, and other factors outlined in section 1.167(a)-1(b) of the regulations. Therefore, the acquiescence in the Shainberg case does not imply the acceptance of the building component lives determined in that case as appropriate useful lives for building components in other shopping center cases.

Part I, Group One, Guideline Class 4 of  Revenue Procedure 62-21, provides that the class for buildings includes the structural shell of the building and all integral parts thereof.

In the case of a composite method of accounting for depreciation of real property improvements, the component groups of property are merely combined into a single composite account and a single overall composite rate for computing depreciation is applied to the entire combined cost or other basis of the property in the account. The composite rate for computing depreciation is derived by determining the amount of one year's depreciation for each component using the useful life for such component, and then by dividing the total amount thus obtained for all the components by the total cost or other basis of all the components in the account. The average rate so obtained is to be used for depreciation purposes as a composite rate for all the property in the account as long as subsequent additions, retirements, or replacements do not substantially alter the relative proportions of different types of components in the account. See section 1.167(b)-1(b), Example (2) of the regulations.

Under either the composite method of computing depreciation for real property improvements or the component grouping method of computing depreciation for the same property, the depreciation allowance properly computed would be substantially the same on a year by year basis without significant differences under either method.

Accordingly, for purposes of computing depreciation on depreciable real property, it is not proper to use the component method of computing depreciation by assigning the guideline class life from Revenue Procedure 62-21 to the structural shell of a building and assign different useful lives to the other integral parts or components of the building. Furthermore, Revenue Procedure 62-21 may only be used where all the assets of the guideline class (building shell and its components) are included in the same guideline class for which one overall composite useful life is used for computing depreciation.