Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 75-34

1975-1 C.B. 271

Sec. 1231
Sec. 1245

IRS Headnote

Forfeited deposits; returnable cable reels. Returnable reels used by a manufacturer to ship cable to a customer, who pays a deposit refundable within one year for the reels, are depreciable property used in the taxpayer's trade or business within the meaning of section 1231(b) of the Code and gain or loss recognized as a result of retaining the forfeited deposits is treated in accordance with the provisions of section 1231(a), subject to recapture under section 1245; Rev. Rul. 58-77 revoked.

Full Text

Rev. Rul. 75-34

P corporation manufactures cable that is sold to customers on steel reels having a useful life of eight years. The customers are required to make a refundable deposit for the reels. P's contracts provide that if the reels are not returned within one year from the invoice date title thereto will pass to the customer and P will retain the deposit as the agreed sales price for such reels. P has capitalized its cost of the reels and maintains adequate records reflecting depreciation and other factors necessary in the computation of gain or loss on the sale of the reels. P's experience is that most of the reels are returned by the customers within the one-year period.

Held, under the above facts, the reels "sold" are depreciable property used in P's trade or business within the meaning of section 1231(b) of the Internal Revenue Code of 1954. Accordingly, any gain or loss recognized by P as a result of retaining customers deposits, because of nonreturn of the containers within the one-year period, is to be treated in accordance with the provisions of section 1231(a) subject to the provisions of section 1245. Philadelphia Quartz Co. v. United States, 374 F. 2d 512 (Ct. Cl. 1967).

Rev. Rul. 58-77, 1958-1 C.B. 118, which held that any gain realized or loss sustained because of the failure of customers to return containers, for which deposits are required, within the specified period, is ordinary gain or loss, is revoked.