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 Rev. Rul. 77-10

1977-1 C.B. 62

Section 167

IRS Headnote

Class life system; abnormal retirement. In determining the adjusted basis of abnormally retired assets put into service prior to 1971 by a public utility, which elected to use the class life system of computing depreciation for the years 1971 through 1974, depreciation to be taken into account for the period after 1970 is determined by assuming that the class life is the average expected useful life of the assets in the composite account, and depreciation prior to 1971 is based on the individual lives of the assets; Rev. Rul. 74-114 clarified.

Full Text

Rev. Rul. 77-10

Advice has been requested regarding depreciation to be taken into account in determining the adjusted basis for abnormal retirements from a public utility composite account, under the circumstances described below.

The taxpayer is a public utility engaged in the production, purchase, distribution, and sale of electricity and gas. The taxpayer owned and operated a manufactured gas production plant. All of the plant assets were placed in service prior to January 1, 1971, and the taxpayer elected to use the class life system under section 1.167(a)-12 of the Income Tax Regulations for the taxable years 1971 through 1974. The taxpayer used a composite guideline class for all of the depreciable assets under the provisions of Rev. Proc. 62-21, 1962-2 C.B. 418, Rev. Proc. 64-21, 1964-1 C.B. 685, and Rev. Proc. 72-10, 1972-1 C.B. 721.

The entire plant was retired in the taxable year 1974 under such circumstances that the retirement was an abnormal one within the meaning of section 1.167(a)-8(b) of the regulations.

Section 1.167(a)-8(b) of the regulations provides, in part, that a retirement may be abnormal if the asset is withdrawn at a time earlier than the range of years taken into consideration in fixing the depreciation rate, or the asset has lost its usefulness suddenly as the result of extraordinary obsolescence.

Section 1.167(a)-8(c)(3) of the regulations provides, in part, that, in the case of an abnormal retirement from a multiple asset account, the adjustment for depreciation allowed or allowable shall be made at the rate that would have been proper had the asset been depreciated in a single asset account (under the method of depreciation used for the multiple asset account) and using a rate based upon either the average expected useful life or the maximum expected useful life of the asset, depending upon the method of determining the rate of depreciation used in connection with the multiple asset account.

Section 1.167(a)-12(a)(1) of the regulations provides, in part, for an elective class life system for determining the reasonable allowance for depreciation for certain classes of assets for taxable years ending after December 31, 1970. The system applies only to assets placed in service before January 1, 1971.

Section 1.167(a)-12(b)(3)(iii) of the regulations provides that an electric or gas utility, which in accordance, with Rev. Proc. 64-21, used a composite guideline class basis for applying Rev. Proc. 62-21 for its last taxable year prior to January 1, 1971, may apply Rev. Proc. 72-10 and section 1.167(a)-12 on the basis of such composite asset guideline class determined as provided in Rev. Proc. 64-21. For the purpose of section 1.167(a)-12, all property in the composite guideline class shall be treated as included in a single asset guideline class.

Section 1.167(a)-12(d)(2)(i) of the regulations states, in part, that the provisions of this subparagraph and section 1.167(a)-8 apply to retirements of qualified property to which the taxpayer elects to apply 1.167(a)-12 for the taxable year.

Section 1.167(a)-12(d)(2)(ii) of the regulations provides that, in determining the adjusted basis of assets retired in the case of a taxpayer who depreciates qualified property in a multiple asset account conforming to the asset guideline class at a rate based on the class life in accordance with section 1.167(a)-12(a)(5)(ii)(a), section 1.167(a)-8(c) (relating to basis of assets retired) shall be applied by assuming that the class life is the average expected useful life of the assets in the account.

Since the taxpayer elected to compute depreciation after 1970 under the class life system, section 1.167(a)-8(c)(3) of the regulations must be read in light of section 1.167(a)-12(b)(3)(iii) and section 1.167(a)-12(d)(2)(ii) in computing the adjustment for depreciation allowed or allowable after 1970 for purposes of determining the adjusted basis for gain or loss of the abnormally retired assets. Accordingly, in determining the adjusted basis of the abnormally retired assets in the instant case, accruals of depreciation to be taken into account for the period of time that the class life system was effective (i.e., after December 31, 1970) are to be determined in accordance with the provisions of section 1.167(a)-8(c)(3) applied by assuming that the class life is the average expected useful life of the assets in the composite account. However, since it was not the intent of section 1.167(a)-12 to apply this rule retroactively to pre-1971 depreciation in determining adjusted basis for gain or loss, accruals of depreciation to be taken into account for the period of time prior to January 1, 1971, in determining the adjusted basis of the abnormally retired assets, are to be determined based on the individual lives of the assets within the class in accordance with the provisions of section 1.167(a)-8(c)(3), and Rev. Rul. 74-114, 1974-1 C.B. 56.

Rev. Rul. 74-114 involves the determination of depreciation for assets abnormally retired prior to 1971, when Rev. Proc. 62-21 was used to compute depreciation, and states, in part, that a taxpayer electing to use the class life system under section 1.167(a)-12 of the regulations is to determine depreciation allowable for assets retired after 1970 in accordance with section 1.167(a)-12(d)(2)(ii). Rev. Rul. 74-114 is clarified concerning the depreciation allowable for abnormally retired assets where depreciation was accrued prior to 1971 in accordance with Rev. Proc. 62-21 and Rev. Proc. 64-21, and after 1970 on the basis of section 1.167(a)-12 and Rev. Proc. 72-10.