Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 76-12

1976-1 C.B. 91

Section 167
Section 312

IRS Headnote

Earnings and profits; useful life of depreciable assets. A corporation may not use a remaining useful life for a particular asset, to compute straight-line depreciation for earnings and profits purposes, that is different from the remaining useful life used to compute its taxable income.

Full Text

Rev. Rul. 76-12

Advice has been requested whether, under the circumstances described below, a taxpayer may use an estimated remaining useful life to compute straight-line depreciation for earnings and profits purposes that is different from the remaining useful life used for other Federal income tax purposes with respect to the same property.

The taxpayer, a domestic corporation, files its Federal income tax returns on the basis of a calendar year. In computing its taxable income for the taxable year 1973, the taxpayer used an accelerated method of depreciation for certain assets some of which were acquired in prior years. In computing its earnings and profits for 1973, the taxpayer used the straight-line method of depreciation for the same assets. The estimated remaining useful life used for earnings and profits purposes was different from the remaining life used for income tax purposes.

Section 312(m) of the Internal Revenue Code of 1954 provides the general rule that straight-line depreciation shall be used for the purpose of computing earnings and profits for taxable years beginning after June 20, 1972.

Section 1.312-15(a) of the Income Tax Regulations provides, in part, that in determining the earnings and profits of a corporation depreciation must be computed under the straight-line method notwithstanding that for computing the Federal tax liability an accelerated method of depreciation is used.

Section 1.312-15(b)(1) of the regulations setting forth the transitional rule for determining depreciation for earnings and profits purposes for taxable years beginning after June 30, 1972, provides, in part, that the estimated remaining useful life of property shall be determined in accordance with the circumstances existing at that time.

Section 1.167(a)-1 of the regulations provides, in part, that the estimated remaining useful life of an asset may be subject to modification by reason of conditions known to exist at the end of the taxable year and shall be redetermined when necessary regardless of the method of computing depreciation.

Although section 1.312-15(b)(1) of the regulations requires that circumstances existing at the time of transition shall be taken into account in determining the remaining useful life of an asset, nothing therein suggests that its application can result in a dual life for a single asset. On the contrary, a single asset can have only one useful life and the fact that a taxpayer uses one method of depreciation for computing the Federal tax liability and another for earnings and profits purposes does not change this fundamental principle.

Accordingly, with respect to a particular asset, the taxpayer must use the same remaining useful life both for income tax purposes and earnings and profits purposes. Further, where, as here, the taxpayer takes an inconsistent position with respect to the remaining useful life of a particular asset, the Internal Revenue Service will, for earnings and profits purposes, use the same remaining life that the taxpayer used for income tax purposes. However, if at a later date the taxpayer's income tax return is examined and the examining officer changes the remaining useful life of any asset and the taxpayer agrees to such change, an appropriate redetermination of the taxpayer's earnings and profits is made.