Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 77-9

1977-1 C.B. 59

Section 167
Section 446

IRS Headnote

Depreciation; change in method; CLADR vintage accounts. A public utility that uses the flow through method of accounting may change, under the CLADR system, its method of depreciating its 1975 vintage accounts on its 1976 tax return from the double declining balance method to the sum of the years-digits method since such a change results in a smaller depreciation expense. However, the public utility may not similarly change its method of depreciating its 1971 through 1974 vintage accounts since such a change would result in a greater depreciation expense.

Full Text

Rev. Rul. 77-9

Advice has been requested whether, under the circumstances described below, a public utility, may change its method of depreciation on its 1976 Federal income tax return from the double declining balance method to the sum of the years-digits method for its 1971 through 1975 vintage accounts under the provisions of the class life asset depreciation range (CLADR) system.

The taxpayer is a public utility engaged in the generation, transmission, distribution, and sale of electricity, whose rates are subject to regulation by the Public Utility Commission of state X.

The taxpayer uses the flow-through method of accounting to compute its tax expense to reflect operating results in its regulated books of account as described in section 167(1)(3)(H) of the Internal Revenue Code of 1954. The taxpayer's applicable 1968 method of depreciation under the provisions of section 167(1)(2)(C) was the double declining balance method; this method was used on its latest tax return filed before August 1, 1969. The double declining balance method was continued through 1975 on its tax returns.

The taxpayer, in accordance with section 1.167(a)-11(c)(1)(iii)(a) of the Income Tax Regulations, seeks to change from the double declining balance method to the sum of the years-digits method of depreciation on its 1976 tax return for its 1971 through 1975 vintage accounts. The taxpayer's depreciation expense for the year 1976 with respect to its 1975 vintage accounts would be less when computed under the sum of the years-digits method than under the double declining balance method of depreciation. However, for its 1971 through 1974 vintage accounts the depreciation expense would be greater.

Section 1.167(a)-11(c)(1)(iii)(a) of the regulations provides in part that during the asset depreciation period for a vintage account, a taxpayer is permitted to change from a declining balance method of depreciation to the sum of the years-digits method of depreciation with respect to such account.

Section 1.167(1)-1(d)(2) specifies the method of depreciation that may be applied to "post-1969 public utility property." It limits a taxpayer who used a flow-through method of regulated accounting for its July 1969 regulated accounting period for property of the same kind most recently placed in service to a choice between a "subsection (1) method" or the "applicable 1968 method." Section 1.167(1)-1(f) provides that the term "subsection (1) method" does not include any declining balance method or sum of the years-digits method.

Section 1.167(1)-1(e)(1) of the regulations states, in part, that the term "applicable 1968 method" means with respect to any public utility property, for the year of change and subsequent years, a method of depreciation otherwise allowable under section 167 of the Code to which the taxpayer changes from an applicable 1968 method, if such new method results in a lesser allowance for depreciation for such property under section 167 in the year of change and the taxpayer secures the Commissioner's consent to the change in accordance with the procedures of section 446(e) and section 1.446-1.

Section 1.446-1(e)(2)(i) of the regulations provides, in part, that when a taxpayer changes its method of accounting, the taxpayer shall, before computing income upon such new method for purposes of taxation, secure the consent of the Commissioner, except as otherwise expressly provided in chapter 1 of the Code and regulations thereunder.

Since the taxpayer proposes to change from a faster depreciation method to a slower method of depreciation on its 1976 tax return, which results in a lesser allowance for depreciation under the new method of depreciation for its 1975 vintage accounts, such a change of accounting will be permitted in accordance with section 1.167(1)-1(e)(1) of the regulations and will not require the consent of the Commissioner pursuant to section 1.446-1(e)(2)(i) and section 1.167(a)-11(c)(1)(iii)(a). However, for the taxpayer's 1971 through 1974 vintage accounts, a proposed change from a slower method of depreciation to a faster method of depreciation, resulting in a greater allowance for depreciation, is not permitted under the specific provisions of section 1.167(1)-1(e)(1), notwithstanding the general provisions of section 1.167(a)-11(c)(1)(iii)(a).

Accordingly, the taxpayer is allowed to change on its 1976 tax return from the double declining balance method of depreciation to the sum of the years-digits method of depreciation for its 1975 vintage accounts. However, the taxpayer in the instant case is not allowed to change from the double declining balance method of depreciation to sum of the years-digits method of depreciation for its 1971 through 1974 vintage accounts.