Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 76-46

1976-1 C.B. 55

Section 167

IRS Headnote

Depreciation; book and guideline differences. A taxpayer that had permanently regrouped pre-1954 asset closed-end straight line book accounts into several straight line multiple asset guideline accounts for tax purposes but for book purposes continued to maintain individual accounts for the assets, some of which have been depreciated down to or below a reasonable salvage, may continue to claim an allowance for depreciation until the guideline account reaches a reasonable salvage.

Full Text

Rev. Rul. 76-46

Advice has been requested whether, under the circumstances described below, a taxpayer may continue to depreciate an account that has not been depreciated down to a reasonable salvage value even though for book purposes the assets in this account are included in separate accounts some of which have been depreciated down to or below a reasonable salvage.

The taxpayer, a railroad company, depreciated all of its depreciable assets on a straight line basis and grouped them into various accounts prior to 1954 as required by the Interstate Commerce Commission (ICC). Beginning in 1954, the taxpayer availed itself of various other methods of depreciation permitted by the Internal Revenue Code of 1954 for all additions of qualified depreciable property. Thus, the straight line book accounts became, in effect, closed-end accounts as of December 31, 1953. Prior to 1971, the taxpayer claimed depreciation pursuant to the guidelines contained in Rev. Proc. 62-21, 1962-2 C.B. 418, and permanently regrouped the pre-1954 closed-end straight line book accounts into several straight line multiple asset guideline accounts for tax purposes. The taxpayer continued to maintain the property in individual accounts for book purposes.

For the taxable year 1971 the taxpayer elected to apply the provisions of section 1.167(a)-12 of the Income Tax Regulations to the regrouped eligible property classified in asset guideline class 40.1 of Rev. Proc. 72-10, 1972-1 C.B. 721.

Asset guideline class 40.1 includes the following book accounts of the taxpayer:

Road accounts:

(16) Station and office buildings (freight handling machinery and equipment only)
(26) Communication systems
(27) Signals and interlockers
(37) Roadway machines
(44) Shop machinery
Equipment accounts:
(52) Locomotives
(53) Freight train cars
(54) Passenger train cars
(55) Highway revenue equipment
(57) Work equipment

In the instant case, certain of the closed-end straight line multiple asset accounts had a remaining depreciable basis. However, some of the individual book accounts had been depreciated down to or below a reasonable salvage. Section 1.167(a)-7(c) of the regulations provides, in part, that taxpayers may establish as many accounts for depreciable property as they desire. In the event that reserves for book purposes do not correspond with reserves maintained for tax purposes, permanent auxiliary records shall be maintained with the regular books of account reconciling the differences in depreciation for tax and book purposes because of different methods of depreciation, bases, rates, salvage, or other factors.

Section 1.167(a)-12(a)(5)(iv) of the regulations provides, in part, that without the consent of the Commissioner the taxpayer may for any taxable year for which it elects to apply this section to an asset guideline class, regroup its accounts for that and all succeeding taxable years to conform to the asset guideline class. Other changes in accounting, including a change from item to multiple asset accounting, may be made with the consent of the Commissioner. No depreciation accounts for which the straight line or sum of the years-digits method of depreciation is adopted may be combined under this section which would not be permitted to be combined under part III of Rev. Proc. 65-13, 1965-1 C.B. 759, as in effect on January 1, 1971.

Section 1.167(a)-12(a)(5)(vi) of the regulations provides, in part, that no depreciation account may be depreciated below a reasonable salvage value for the account.

In the instant case, the "account" for Federal income tax purposes is the closed-end straight line multiple asset account and not the individual book accounts. Accordingly, the taxpayer may claim an allowance for depreciation with respect to the basis of assets in the closed-end straight line multiple asset account containing only assets properly included in asset guideline class 40.1 for the taxable year 1971 and thereafter until the account has been depreciated to a reasonable salvage value, notwithstanding that for book purposes some of the individual accounts (described in class 40.1) have been depreciated down to or below a reasonable salvage value.

The reasonable salvage value and basis of the accounts are questions of fact.