Internal Revenue Service
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 Rev. Rul. 79-57

1979-1 C.B. 102

Section 167

IRS Headnote

Depreciation; change in method; CLADR vintage accounts; public utility. A public utility that uses the flow-through method of accounting under the CLADR system may change its method of depreciating its 1971 vintage accounts on its 1978 return from the double declining balance method to the straight line method even though the change results in a depreciation allowance greater than that computed under the double declining balance method; Rev. Rul. 77-9 distinguished.

Full Text

Rev. Rul. 79-57

ISSUE

May a public utility change its method of depreciation, on its 1978 tax return, from the double declining balance to the straight line method for its 1971 vintage accounts under the provisions of the Class Life Asset Depreciation Range (CLADR) system?

FACTS

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 reflect operating results in its regulated books of accounts 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) of the Code, was the double declining balance method which was used on its latest tax return filed before August 1, 1969, and was continually used through 1977.

The taxpayer, in accordance with the provisions of section 1.167(a)-11(c)(1)(iii)(a) of the Income Tax Regulations, wishes to change from the double declining balance method to the straight line method of depreciation on its 1978 tax return for its 1971 vintage accounts. The taxpayer's depreciation allowance for such accounts when computed under the straight line method for the 1978 year would be greater than that computed under the double declining balance method.

LAW AND ANALYSIS

Section 1.167(a)-11(c)(1)(iii)(a) of the regulations provides that, during the asset depreciation period for a vintage account, a taxpayer has the consent of the Commissioner to change from a declining balance method to the straight line method of depreciation with respect to such account.

Section 167(1)(2) of the Code provides, with respect to post 1969 utility property, that a reasonable allowance for depreciation means an allowance computed under a subsection (1) method, an accelerated method, if the taxpayer uses normalization, or the "applicable 1968 method." Section 1.167(1)-1(a)(1) of the regulations provides that a public utility taxpayer may always use the straight line method of depreciation. See H.R. Report No. 91-413, 91st Cong., 1st Sess., 1969-3 C.B. 200, and S. Report No. 91-552, 91st Cong., 1st Sess. (1969), 1969-3 C.B. 423.

In the present case, the taxpayer wishes to change from its "applicable 1968 method," double declining balance, to the straight line method, a method allowed under section 167(1)(2)(A) of the Code. Consequently, section 1.167(1)-1(e)(1) of the regulations is not applicable to the change. Therefore, the taxpayer is permitted to change to the straight line method even though the change does not result in a lesser allowance for depreciation.

HOLDING

The public utility taxpayer may change on its 1978 tax return from the double declining balance method to the straight line method of depreciation for its 1971 vintage accounts notwithstanding that the taxpayer's depreciation allowance for such accounts when computed under the straight line method for the 1978 year would be greater than that computed under the double declining balance method.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 77-9, 1977-1 C.B. 59, is distinguished. In that case the flow-through taxpayer changed from the double declining balance to the sum of the years digits method, which is not a "subsection (1) method." Therefore, section 1.167(1)-1(e)(1) of the regulations was applicable and the taxpayer was only permitted to change when the result provided a lesser allowance for depreciation.