Changes in Computing Depreciation, 78066-78073 [06-9892]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 71, Number 249 (Thursday, December 28, 2006)]
[Rules and Regulations]
[Pages 78066-78073]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-9892]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9307]
RIN 1545-BC18


Changes in Computing Depreciation

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains regulations relating to a change in 
computing depreciation or amortization as well as a change from a 
nondepreciable or nonamortizable asset to a depreciable or amortizable 
asset (or vice versa). Specifically, these regulations provide guidance 
to any taxpayer that makes a change in depreciation or amortization on 
whether such a change is a change in method of accounting under section 
446(e) of the Internal Revenue Code and on the application of section 
1016(a)(2) in determining whether the change is a change in method of 
accounting.

DATES: Effective Date. These regulations are effective December 28, 
2006.
    Applicability Dates. For dates of applicability, see Sec. Sec.  
1.167(e)-1(e), 1.446-1(e)(4), and 1.1016-3(j).

FOR FURTHER INFORMATION CONTACT: Douglas H. Kim, (202) 622-3110 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR part 1. On January 2, 
2004, the IRS and Treasury Department published temporary regulations 
(TD 9105) in the Federal Register (69 FR 5) relating to the application 
of section 446(e) of the Internal Revenue Code (Code) and Sec.  
1.167(e)-1 to a change in depreciation or amortization and the 
application of section 1016(a)(2) in determining whether a change in 
depreciation or amortization is a change in method of accounting. On 
the same date, the IRS published a notice of proposed rulemaking (REG-
126459-03) cross-referencing the temporary regulations in the Federal 
Register (69 FR 42). No public hearing was requested or held. Several 
comments responding to the notice of proposed rulemaking were received. 
After consideration of all the comments, the proposed regulations are 
adopted as amended by this Treasury decision, and the corresponding 
temporary regulations are removed. The revisions are discussed here in 
this preamble.
    Section 1400N(d), which was added to the Code by section 101(a) of 
the Gulf Opportunity Zone Act of 2005, Public Law 109-135 (119 Stat. 
2577), generally allows a 50-percent additional first year depreciation 
deduction for qualified Gulf Opportunity Zone property. The final 
regulations reflect the enactment of section 1400N(d).

Explanation of Provisions

Scope

    The final regulations provide the changes in depreciation or 
amortization (depreciation) for property for which depreciation is 
determined under section 167, 168, 197, 1400I, 1400L(b), 1400L(c), or 
1400N(d), or former section 168, of the Code that are, and those 
changes that are not, changes in method of accounting under section 
446(e). The final regulations also clarify that the rules in Sec.  
1.167(e)-1 with respect to a change in the depreciation method made 
without the consent of the Commissioner apply only to property for 
which depreciation is determined under section 167 (other than under 
section 168, 1400I, 1400L, or 1400N(d), or former section 168). 
Additionally, the final regulations provide that section 1016(a)(2) 
does not permanently affect a taxpayer's lifetime income for purposes 
of determining whether a change in depreciation is a change in method 
of accounting under section 446(e) and Sec.  1.446-1(e).

I. Changes in Depreciation Method Under Section 167

    The final regulations retain the rules contained in the temporary 
regulations providing that the rules in Sec.  1.167(e)-1 with respect 
to a change in depreciation method under Sec.  1.167(e)-1(b), (c), and 
(d) made without the consent of the Commissioner apply only to property 
for which depreciation is determined under section 167 (other than 
under section 168, 1400I, 1400L, or 1400N(d), or former section 168). 
No comments were received suggesting changes to these rules.

II. Changes in Depreciation That Are, and Are Not, a Change in Method 
of Accounting Under Section 446(e)

    The final regulations provide rules on the changes in depreciation 
that are, and are not, a change in method of accounting under section 
446(e).

A. Changes in Depreciation That Are Changes in Method of Accounting

    The final regulations retain the rules contained in the temporary 
regulations providing the changes in depreciation that are a change in 
method of accounting under section 446(e). These changes are a change 
in the treatment of an asset from nondepreciable or nonamortizable to 
depreciable or amortizable, or vice versa. Additionally, a correction 
to require depreciation in lieu of a deduction for the cost of 
depreciable or amortizable assets that had been consistently treated as 
an expense in the year of purchase, or vice versa, is a change in 
method of accounting. Further, changes in computing depreciation 
generally are a change in method of accounting, including a change in 
the depreciation method, period of recovery, or convention of a 
depreciable or amortizable asset, and a change to or from claiming the 
additional first year depreciation deduction provided by section 
168(k), 1400L(b), or 1400N(d) under certain circumstances.
    No comments were received suggesting changes to these rules. 
However, a commentator inquired whether a calendar-year taxpayer that 
has not claimed the 30-percent additional first year depreciation for 
qualified property acquired after September 10, 2001, and placed in 
service prior to January 1, 2002, may claim the 30-percent additional 
first year depreciation by requesting a change in method of accounting. 
To claim the 30-percent additional first year depreciation for this 
property, Rev. Proc. 2003-50 (2003-2 C.B. 119) provides that the 
taxpayer had to file an amended return on or before December 31, 2003, 
or file a Form 3115, ``Application for Change in Accounting Method,'' 
with the taxpayer's timely filed 2003 Federal tax return. If the 
taxpayer did not file this amended return or Form 3115, the taxpayer 
has made the deemed election not to deduct the additional first year 
depreciation for the 2001 taxable year. Accordingly, the taxpayer's 
change to claiming the 30-percent additional first year depreciation 
for qualified property placed in service in the taxable year that 
included September 11, 2001, is not a change in method of accounting 
under

[[Page 78067]]

the temporary and final regulations. Instead, the taxpayer must file a 
request for a letter ruling to revoke the election.
    Another commentator questioned whether the temporary regulations 
affected the procedures for obtaining consent to make a change in 
method of accounting. The regulations did not change these procedures 
and, accordingly, the rules in Sec.  1.446-1(e)(3) apply to a change in 
depreciation that is a change in method of accounting. Other 
commentators inquired whether a change in depreciation due to a posting 
or mathematical error, or a change in underlying facts, is a change in 
method of accounting. A change in depreciation due to a posting or 
mathematical error, or a change in underlying facts, is not a change in 
method of accounting because the rules in Sec.  1.446-1(e)(2)(ii)(a) 
and (b) also apply to a change in depreciation. Accordingly, the final 
regulations clarify this point.

B. Changes in Depreciation That Are Not Changes in Method of Accounting

    The final regulations retain the rule contained in the temporary 
regulations that a change in method of accounting does not include an 
adjustment in the useful life of a depreciable or amortizable asset for 
which depreciation is determined under section 167 (other than under 
section 168, 1400I, 1400L, or 1400N(d), or former section 168). This 
rule does not apply, however, if a taxpayer is changing to or from a 
useful life (or recovery period or amortization period) that is 
specifically assigned by the Code, the regulations under the Code, or 
other guidance published in the Internal Revenue Bulletin. Several 
commentators questioned whether the useful life exception from change 
in method of accounting treatment that was in effect before the 
issuance of the temporary regulations has any remaining application. 
Section 1.446-1(e)(2)(ii)(b), as in effect before the issuance of the 
temporary regulations (see Sec.  1.446-1(e) as contained in 26 CFR part 
1 edition revised as of April 1, 2003), provided that a change in the 
method of accounting does not include an adjustment in the useful life 
of a depreciable asset. The rule still applies but is limited by the 
temporary and final regulations to only a depreciable or amortizable 
asset for which depreciation is determined under section 167 (other 
than under section 168, 1400I, 1400L, or 1400N(d), or former section 
168) and to only an adjustment in useful life that is not specifically 
assigned by the Code, the regulations under the Code, or other guidance 
published in the Internal Revenue Bulletin.
    The final regulations also retain the rules contained in the 
temporary regulations of when an adjustment in useful life that is not 
a change in method of accounting is implemented. The final regulations 
clarify that these rules apply regardless of whether the adjustment in 
useful life is initiated by the IRS or a taxpayer. Furthermore, the 
final regulations clarify that in implementing an adjustment in useful 
life that is not a change in method of accounting, no section 481 
adjustment is required or permitted.
    The final regulations retain the rule contained in the temporary 
regulations providing that the making of a late depreciation election 
or the revocation of a timely valid depreciation election is not a 
change in method of accounting, except as otherwise provided by the 
Code, the regulations under the Code, or other guidance published in 
the Internal Revenue Bulletin. A commentator inquired whether a late 
section 179 election may be made by requesting a change in method of 
accounting. Under section 179 and the regulations under section 179, a 
late section 179 election generally is made by submitting a request for 
a letter ruling. However, for a taxable year beginning after 2002 and 
before 2010, a taxpayer may make a section 179 election by filing an 
amended return. Accordingly, the IRS and Treasury Department have 
included a cross-reference to section 179(c) and Sec.  1.179-5.
    The final regulations retain the rule contained in the temporary 
regulations providing that any change in the placed-in-service date of 
a depreciable or amortizable asset is not treated as a change in method 
of accounting. The final regulations, however, clarify that this rule 
does not apply when the Code, the regulations under the Code, or other 
guidance published in the Internal Revenue Bulletin, provide that a 
change in placed-in-service date is treated as a change in method of 
accounting. A commentator requested that the final regulations clarify 
what constitutes a change in placed-in-service date. To illustrate the 
rule, the IRS and Treasury Department provided additional clarification 
in the final regulations. For example, the final regulations provide 
that if a taxpayer changes the placed-in-service date of a depreciable 
or amortizable asset because the taxpayer incorrectly determined the 
date on which the asset was placed in service, this change is not a 
change in method of accounting. However, if a taxpayer incorrectly 
determines that a depreciable or amortizable asset is nondepreciable 
property and later changes the treatment of the asset to depreciable 
property, this change is not a change in the placed-in-service date of 
the asset but is a change from nondepreciable to depreciable property 
and, therefore, the change is a change in method of accounting. The 
final regulations also clarify that a change in the convention of a 
depreciable or amortizable asset is not a change in the placed-in-
service date of the asset and, therefore, is a change in method of 
accounting. Additionally, the final regulations provide examples 
illustrating what constitutes a change in placed-in-service date.
    The final regulations retain the rules contained in the temporary 
regulations as to how and when a change in placed-in-service date that 
is not a change in method of accounting is implemented. The final 
regulations also clarify that these rules apply regardless of whether 
the change in placed-in-service date is made by the IRS or a taxpayer. 
Finally, the final regulations provide that in implementing a change in 
placed-in-service date that is not a change in method of accounting, no 
section 481 adjustment is required or permitted.

C. Item Being Changed

    The final regulations retain the rule contained in the temporary 
regulations providing that for purposes of a change in depreciation, 
the item being changed is the depreciation treatment of each individual 
depreciable or amortizable asset or the depreciation treatment of each 
vintage account with respect to a depreciable asset for which 
depreciation is determined under Sec.  1.167(a)-11 (CLADR). Because 
general asset accounts and mass asset accounts are similar to vintage 
accounts, the final regulations clarify that the item is the 
depreciable treatment of each general asset account with respect to a 
depreciable asset for which general asset account treatment has been 
elected under section 168(i)(4) or the item is the depreciation 
treatment of each mass asset account with respect to a depreciable 
asset for which mass asset account treatment has been elected under 
former section 168(d)(2)(A). The final regulations also retain the rule 
contained in the temporary regulations providing that a change in 
depreciation under section 167 (other than under section 168, 1400I, 
1400L, or 1400N(d), or former section 168) is permitted only with 
respect to all assets in a particular account (as defined in Sec.  
1.167(a)-7) or vintage account.

D. Effective Dates

    Several commentators questioned the application of the effective 
date of the temporary regulations. In response, the

[[Page 78068]]

IRS, in Chief Counsel Notice 2004-007 (CC-2004-007, January 28, 2004) 
and Chief Counsel Notice 2004-024 (CC-2004-024, July 12, 2004) (see 
www.irs.gov/foia), clarified that the temporary regulations apply to 
property placed in service in a taxable year ending on or after 
December 30, 2003. In accordance with this clarification, the final 
regulations apply only to a change in depreciation made by a taxpayer 
for a depreciable or amortizable asset placed in service by the 
taxpayer in a taxable year ending on or after December 30, 2003, 
regardless of whether or not the change in depreciation is a change in 
method of accounting. Additionally, the examples in the final 
regulations relating to a change in depreciation have been revised to 
reflect this effective date.

III. Application of Section 1016(a)(2) to a Change in Method of 
Accounting

    The final regulations contain the same rule as the temporary 
regulations, providing that section 1016(a)(2) does not permanently 
affect a taxpayer's lifetime income for purposes of determining whether 
a change in depreciation for property subject to section 167, 168, 
1400I, 1400L, or 1400N(d), or former section 168, is a change in method 
of accounting under section 446(e) and the regulations under section 
446(e). No comments were received suggesting changes to this rule.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations and, because 
these regulations do not impose on small entities a collection of 
information requirement, the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis 
is not required. Pursuant to section 7805(f) of the Code, the notice of 
proposed rulemaking was submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on its impact on small 
business.

Drafting Information

    The principal author of these regulations is Douglas H. Kim, Office 
of Associate Chief Counsel (Passthroughs and Special Industries). 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

0
Par. 2. Section 1.167(e)-1 is amended by revising paragraphs (a) and 
(e) to read as follows:


Sec.  1.167(e)-1  Change in method.

    (a) In general. (1) Any change in the method of computing the 
depreciation allowances with respect to a particular account (other 
than a change in method permitted or required by reason of the 
operation of former section 167(j)(2) and Sec.  1.167(j)-3(c)) is a 
change in method of accounting, and such a change will be permitted 
only with the consent of the Commissioner, except that certain changes 
to the straight line method of depreciation will be permitted without 
consent as provided in former section 167(e)(1), (2), and (3). Except 
as provided in paragraphs (c) and (d) of this section, a change in 
method of computing depreciation will be permitted only with respect to 
all the assets contained in a particular account as defined in Sec.  
1.167(a)-7. Any change in the percentage of the current straight line 
rate under the declining balance method, for example, from 200 percent 
of the straight line rate to any other percent of the straight line 
rate, or any change in the interest factor used in connection with a 
compound interest or sinking fund method, will constitute a change in 
method of depreciation. Any request for a change in method of 
depreciation shall be made in accordance with section 446(e) and the 
regulations under section 446(e). For rules covering the use of 
depreciation methods by acquiring corporations in the case of certain 
corporate acquisitions, see section 381(c)(6) and the regulations under 
section 381(c)(6).
    (2) Paragraphs (b), (c), and (d) of this section apply to property 
for which depreciation is determined under section 167 (other than 
under section 168, section 1400I, section 1400L(c), under section 168 
prior to its amendment by the Tax Reform Act of 1986 (100 Stat. 2121), 
or under an additional first year depreciation deduction provision (for 
example, section 168(k), 1400L(b), or 1400N(d))) of the Internal 
Revenue Code.
* * * * *
    (e) Effective date. This section applies on or after December 30, 
2003. For the applicability of regulations before December 30, 2003, 
see Sec.  1.167(e)-1 in effect prior to December 30, 2003 (Sec.  
1.167(e)-1 as contained in 26 CFR part 1 edition revised as of April 1, 
2003).


Sec.  1.167(e)-1T  [Removed]

0
Par. 3. Section 1.167(e)-1T is removed.

0
Par. 4. Section 1.168(i)-4 is amended as follows:
0
1. Paragraph (f) is amended by removing the language ``Sec.  1.446-
1T(e)(2)(ii)(d)(3)(ii)'' at the end of the paragraph and adding ``Sec.  
1.446-1(e)(2)(ii)(d)(3)(ii)'' in its place.
0
2. Paragraph (g)(2)(ii) is amended by removing the language ``as 
modified by Rev. Proc. 2004-11 (2004-3 I.R.B. 311).''

0
Par. 5. Section 1.168(i)-6T is amended as follows:
0
1. Paragraph (k)(2)(i) is amended by removing the language ``Sec.  
1.446-1T(e)(3)(ii)'' and adding ``Sec.  1.446-1(e)(3)(ii)'' in its 
place.
0
2. The last sentence in paragraph (k)(2)(ii) is amended by removing the 
language ``Sec.  1.446-1T(e)(3)(ii)'' and adding ``Sec.  1.446-
1(e)(3)(ii)'' in its place.

0
Par. 6. Section 1.446-1 is amended by revising paragraphs 
(e)(2)(ii)(a), (e)(2)(ii)(b), (e)(2)(ii)(d), (e)(2)(iii), and (e)(4) to 
read as follows:


Sec.  1.446-1  General rule for methods of accounting.

* * * * *
    (e) * * *
    (2) * * *
    (ii) (a) A change in the method of accounting includes a change in 
the overall plan of accounting for gross income or deductions or a 
change in the treatment of any material item used in such overall plan. 
Although a method of accounting may exist under this definition without 
the necessity of a pattern of consistent treatment of an item, in most 
instances a method of accounting is not established for an item without 
such consistent treatment. A material item is any item that involves 
the proper time for the inclusion of the item in income or the taking 
of a deduction. Changes in method of accounting include a change from 
the cash receipts and disbursement method to an accrual method, or vice 
versa, a change involving the method or basis used in the valuation of 
inventories (see sections 471 and 472 and the regulations under 
sections 471 and 472),

[[Page 78069]]

a change from the cash or accrual method to a long-term contract 
method, or vice versa (see Sec.  1.460-4), certain changes in computing 
depreciation or amortization (see paragraph (e)(2)(ii)(d) of this 
section), a change involving the adoption, use or discontinuance of any 
other specialized method of computing taxable income, such as the crop 
method, and a change where the Internal Revenue Code and regulations 
under the Internal Revenue Code specifically require that the consent 
of the Commissioner must be obtained before adopting such a change.
    (b) A change in method of accounting does not include correction of 
mathematical or posting errors, or errors in the computation of tax 
liability (such as errors in computation of the foreign tax credit, net 
operating loss, percentage depletion, or investment credit). Also, a 
change in method of accounting does not include adjustment of any item 
of income or deduction that does not involve the proper time for the 
inclusion of the item of income or the taking of a deduction. For 
example, corrections of items that are deducted as interest or salary, 
but that are in fact payments of dividends, and of items that are 
deducted as business expenses, but that are in fact personal expenses, 
are not changes in method of accounting. In addition, a change in the 
method of accounting does not include an adjustment with respect to the 
addition to a reserve for bad debts. Although such adjustment may 
involve the question of the proper time for the taking of a deduction, 
such items are traditionally corrected by adjustment in the current and 
future years. For the treatment of the adjustment of the addition to a 
bad debt reserve (for example, for banks under section 585 of the 
Internal Revenue Code), see the regulations under section 166 of the 
Internal Revenue Code. A change in the method of accounting also does 
not include a change in treatment resulting from a change in underlying 
facts. For further guidance on changes involving depreciable or 
amortizable assets, see paragraph (e)(2)(ii)(d) of this section and 
Sec.  1.1016-3(h).
* * * * *
    (d) Changes involving depreciable or amortizable assets--(1) Scope. 
This paragraph (e)(2)(ii)(d) applies to property subject to section 
167, 168, 197, 1400I, 1400L(c), to section 168 prior to its amendment 
by the Tax Reform Act of 1986 (100 Stat. 2121) (former section 168), or 
to an additional first year depreciation deduction provision of the 
Internal Revenue Code (for example, section 168(k), 1400L(b), or 
1400N(d)).
    (2) Changes in depreciation or amortization that are a change in 
method of accounting. Except as provided in paragraph (e)(2)(ii)(d)(3) 
of this section, a change in the treatment of an asset from 
nondepreciable or nonamortizable to depreciable or amortizable, or vice 
versa, is a change in method of accounting. Additionally, a correction 
to require depreciation or amortization in lieu of a deduction for the 
cost of depreciable or amortizable assets that had been consistently 
treated as an expense in the year of purchase, or vice versa, is a 
change in method of accounting. Further, except as provided in 
paragraph (e)(2)(ii)(d)(3) of this section, the following changes in 
computing depreciation or amortization are a change in method of 
accounting:
    (i) A change in the depreciation or amortization method, period of 
recovery, or convention of a depreciable or amortizable asset.
    (ii) A change from not claiming to claiming the additional first 
year depreciation deduction provided by, for example, section 168(k), 
1400L(b), or 1400N(d), for, and the resulting change to the amount 
otherwise allowable as a depreciation deduction for the remaining 
adjusted depreciable basis (or similar basis) of, depreciable property 
that qualifies for the additional first year depreciation deduction 
(for example, qualified property, 50-percent bonus depreciation 
property, qualified New York Liberty Zone property, or qualified Gulf 
Opportunity Zone property), provided the taxpayer did not make the 
election out of the additional first year depreciation deduction (or 
did not make a deemed election out of the additional first year 
depreciation deduction; for further guidance, for example, see Rev. 
Proc. 2002-33 (2002-1 C.B. 963), Rev. Proc. 2003-50 (2003-2 C.B. 119), 
Notice 2006-77 (2006-40 I.R.B. 590), and Sec.  601.601(d)(2)(ii)(b) of 
this chapter) for the class of property in which the depreciable 
property that qualifies for the additional first year depreciation 
deduction (for example, qualified property, 50-percent bonus 
depreciation property, qualified New York Liberty Zone property, or 
qualified Gulf Opportunity Zone property) is included.
    (iii) A change from claiming the 30-percent additional first year 
depreciation deduction to claiming the 50-percent additional first year 
depreciation deduction for depreciable property that qualifies for the 
50-percent additional first year depreciation deduction, provided the 
property is not included in any class of property for which the 
taxpayer elected the 30-percent, instead of the 50-percent, additional 
first year depreciation deduction (for example, 50-percent bonus 
depreciation property or qualified Gulf Opportunity Zone property), or 
a change from claiming the 50-percent additional first year 
depreciation deduction to claiming the 30-percent additional first year 
depreciation deduction for depreciable property that qualifies for the 
30-percent additional first year depreciation deduction, including 
property that is included in a class of property for which the taxpayer 
elected the 30-percent, instead of the 50-percent, additional first 
year depreciation deduction (for example, qualified property or 
qualified New York Liberty Zone property), and the resulting change to 
the amount otherwise allowable as a depreciation deduction for the 
property's remaining adjusted depreciable basis (or similar basis). 
This paragraph (e)(2)(ii)(d)(2)(iii) does not apply if a taxpayer is 
making a late election or revoking a timely valid election under the 
applicable additional first year depreciation deduction provision of 
the Internal Revenue Code (for example, section 168(k), 1400L(b), or 
1400N(d)) (see paragraph (e)(2)(ii)(d)(3)(iii) of this section).
    (iv) A change from claiming to not claiming the additional first 
year depreciation deduction for an asset that does not qualify for the 
additional first year depreciation deduction, including an asset that 
is included in a class of property for which the taxpayer elected not 
to claim any additional first year depreciation deduction (for example, 
an asset that is not qualified property, 50-percent bonus depreciation 
property, qualified New York Liberty Zone property, or qualified Gulf 
Opportunity Zone property), and the resulting change to the amount 
otherwise allowable as a depreciation deduction for the property's 
depreciable basis.
    (v) A change in salvage value to zero for a depreciable or 
amortizable asset for which the salvage value is expressly treated as 
zero by the Internal Revenue Code (for example, section 168(b)(4)), the 
regulations under the Internal Revenue Code (for example, Sec.  1.197-
2(f)(1)(ii)), or other guidance published in the Internal Revenue 
Bulletin.
    (vi) A change in the accounting for depreciable or amortizable 
assets from a single asset account to a multiple asset account 
(pooling), or vice versa, or from one type of multiple asset account 
(pooling) to a different type of multiple asset account (pooling).
    (vii) For depreciable or amortizable assets that are mass assets 
accounted for in multiple asset accounts or pools, a change in the 
method of identifying

[[Page 78070]]

which assets have been disposed. For purposes of this paragraph 
(e)(2)(ii)(d)(2)(vii), the term mass assets means a mass or group of 
individual items of depreciable or amortizable assets that are not 
necessarily homogeneous, each of which is minor in value relative to 
the total value of the mass or group, numerous in quantity, usually 
accounted for only on a total dollar or quantity basis, with respect to 
which separate identification is impracticable, and placed in service 
in the same taxable year.
    (viii) Any other change in depreciation or amortization as the 
Secretary may designate by publication in the Federal Register or in 
the Internal Revenue Bulletin (see Sec.  601.601(d)(2) of this 
chapter).
    (3) Changes in depreciation or amortization that are not a change 
in method of accounting. Section 1.446-1(e)(2)(ii)(b) applies to 
determine whether a change in depreciation or amortization is not a 
change in method of accounting. Further, the following changes in 
depreciation or amortization are not a change in method of accounting:
    (i) Useful life. An adjustment in the useful life of a depreciable 
or amortizable asset for which depreciation is determined under section 
167 (other than under section 168, section 1400I, section 1400L(c), 
former section 168, or an additional first year depreciation deduction 
provision of the Internal Revenue Code (for example, section 168(k), 
1400L(b), or 1400N(d))) is not a change in method of accounting. This 
paragraph (e)(2)(ii)(d)(3)(i) does not apply if a taxpayer is changing 
to or from a useful life (or recovery period or amortization period) 
that is specifically assigned by the Internal Revenue Code (for 
example, section 167(f)(1), section 168(c), section 168(g)(2) or (3), 
section 197), the regulations under the Internal Revenue Code, or other 
guidance published in the Internal Revenue Bulletin and, therefore, 
such change is a change in method of accounting (unless paragraph 
(e)(2)(ii)(d)(3)(v) of this section applies). See paragraph 
(e)(2)(ii)(d)(5)(iv) of this section for determining the taxable year 
in which to correct an adjustment in useful life that is not a change 
in method of accounting.
    (ii) Change in use. A change in computing depreciation or 
amortization allowances in the taxable year in which the use of an 
asset changes in the hands of the same taxpayer is not a change in 
method of accounting.
    (iii) Elections. Generally, the making of a late depreciation or 
amortization election or the revocation of a timely valid depreciation 
or amortization election is not a change in method of accounting, 
except as otherwise expressly provided by the Internal Revenue Code, 
the regulations under the Internal Revenue Code, or other guidance 
published in the Internal Revenue Bulletin. This paragraph 
(e)(2)(ii)(d)(3)(iii) also applies to making a late election or 
revoking a timely valid election made under section 13261(g)(2) or (3) 
of the Revenue Reconciliation Act of 1993 (107 Stat. 312, 540) 
(relating to amortizable section 197 intangibles). A taxpayer may 
request consent to make a late election or revoke a timely valid 
election by submitting a request for a private letter ruling. For 
making or revoking an election under section 179 of the Internal 
Revenue Code, see section 179(c) and Sec.  1.179-5.
    (iv) Salvage value. Except as provided under paragraph 
(e)(2)(ii)(d)(2)(v) of this section, a change in salvage value of a 
depreciable or amortizable asset is not treated as a change in method 
of accounting.
    (v) Placed-in-service date. Except as otherwise expressly provided 
by the Internal Revenue Code, the regulations under the Internal 
Revenue Code, or other guidance published in the Internal Revenue 
Bulletin, any change in the placed-in-service date of a depreciable or 
amortizable asset is not treated as a change in method of accounting. 
For example, if a taxpayer changes the placed-in-service date of a 
depreciable or amortizable asset because the taxpayer incorrectly 
determined the date on which the asset was placed in service, such a 
change is a change in the placed-in-service date of the asset and, 
therefore, is not a change in method of accounting. However, if a 
taxpayer incorrectly determines that a depreciable or amortizable asset 
is nondepreciable property and later changes the treatment of the asset 
to depreciable property, such a change is not a change in the placed-
in-service date of the asset and, therefore, is a change in method of 
accounting under paragraph (e)(2)(ii)(d)(2) of this section. Further, a 
change in the convention of a depreciable or amortizable asset is not a 
change in the placed-in-service date of the asset and, therefore, is a 
change in method of accounting under paragraph (e)(2)(ii)(d)(2)(i) of 
this section. See paragraph (e)(2)(ii)(d)(5)(v) of this section for 
determining the taxable year in which to make a change in the placed-
in-service date of a depreciable or amortizable asset that is not a 
change in method of accounting.
    (vi) Any other change in depreciation or amortization as the 
Secretary may designate by publication in the Federal Register or in 
the Internal Revenue Bulletin (see Sec.  601.601(d)(2) of this 
chapter).
    (4) Item being changed. For purposes of a change in depreciation or 
amortization to which this paragraph (e)(2)(ii)(d) applies, the item 
being changed generally is the depreciation treatment of each 
individual depreciable or amortizable asset. However, the item is the 
depreciation treatment of each vintage account with respect to a 
depreciable asset for which depreciation is determined under Sec.  
1.167(a)-11 (class life asset depreciation range (CLADR) property). 
Similarly, the item is the depreciable treatment of each general asset 
account with respect to a depreciable asset for which general asset 
account treatment has been elected under section 168(i)(4) or the item 
is the depreciation treatment of each mass asset account with respect 
to a depreciable asset for which mass asset account treatment has been 
elected under former section 168(d)(2)(A). Further, a change in 
computing depreciation or amortization under section 167 (other than 
under section 168, section 1400I, section 1400L(c), former section 168, 
or an additional first year depreciation deduction provision of the 
Internal Revenue Code (for example, section 168(k), 1400L(b), or 
1400N(d))) is permitted only with respect to all assets in a particular 
account (as defined in Sec.  1.167(a)-7) or vintage account.
    (5) Special rules. For purposes of a change in depreciation or 
amortization to which this paragraph (e)(2)(ii)(d) applies--
    (i) Declining balance method to the straight line method for MACRS 
property. For tangible, depreciable property subject to section 168 
(MACRS property) that is depreciated using the 200-percent or 150-
percent declining balance method of depreciation under section 
168(b)(1) or (2), a taxpayer may change without the consent of the 
Commissioner from the declining balance method of depreciation to the 
straight line method of depreciation in the first taxable year in which 
the use of the straight line method with respect to the adjusted 
depreciable basis of the MACRS property as of the beginning of that 
year will yield a depreciation allowance that is greater than the 
depreciation allowance yielded by the use of the declining balance 
method. When the change is made, the adjusted depreciable basis of the 
MACRS property as of the beginning of the taxable year is recovered 
through annual depreciation allowances over the remaining recovery 
period (for further guidance, see section 6.06 of Rev. Proc.

[[Page 78071]]

87-57 (1987-2 C.B. 687) and Sec.  601.601(d)(2)(ii)(b) of this 
chapter).
    (ii) Depreciation method changes for section 167 property. For a 
depreciable or amortizable asset for which depreciation is determined 
under section 167 (other than under section 168, section 1400I, section 
1400L(c), former section 168, or an additional first year depreciation 
deduction provision of the Internal Revenue Code (for example, section 
168(k), 1400L(b), or 1400N(d))), see Sec.  1.167(e)-1(b), (c), and (d) 
for the changes in depreciation method that are permitted to be made 
without the consent of the Commissioner. For CLADR property, see Sec.  
1.167(a)-11(c)(1)(iii) for the changes in depreciation method for CLADR 
property that are permitted to be made without the consent of the 
Commissioner. Further, see Sec.  1.167(a)-11(b)(4)(iii)(c) for how to 
correct an incorrect classification or characterization of CLADR 
property.
    (iii) Section 481 adjustment. Except as otherwise expressly 
provided by the Internal Revenue Code, the regulations under the 
Internal Revenue Code, or other guidance published in the Internal 
Revenue Bulletin, no section 481 adjustment is required or permitted 
for a change from one permissible method of computing depreciation or 
amortization to another permissible method of computing depreciation or 
amortization for an asset because this change is implemented by either 
a cut-off method (for further guidance, for example, see section 2.06 
of Rev. Proc. 97-27 (1997-1 C.B. 680), section 2.06 of Rev. Proc. 2002-
9 (2002-1 C.B. 327), and Sec.  601.601(d)(2)(ii)(b) of this chapter) or 
a modified cut-off method (under which the adjusted depreciable basis 
of the asset as of the beginning of the year of change is recovered 
using the new permissible method of accounting), as appropriate. 
However, a change from an impermissible method of computing 
depreciation or amortization to a permissible method of computing 
depreciation or amortization for an asset results in a section 481 
adjustment. Similarly, a change in the treatment of an asset from 
nondepreciable or nonamortizable to depreciable or amortizable (or vice 
versa) or a change in the treatment of an asset from expensing to 
depreciating (or vice versa) results in a section 481 adjustment.
    (iv) Change in useful life. This paragraph (e)(2)(ii)(d)(5)(iv) 
applies to an adjustment in the useful life of a depreciable or 
amortizable asset for which depreciation is determined under section 
167 (other than under section 168, section 1400I, section 1400L(c), 
former section 168, or an additional first year depreciation deduction 
provision of the Internal Revenue Code (for example, section 168(k), 
1400L(b), or 1400N(d))) and that is not a change in method of 
accounting under paragraph (e)(2)(ii)(d) of this section. For this 
adjustment in useful life, no section 481 adjustment is required or 
permitted. The adjustment in useful life, whether initiated by the 
Internal Revenue Service (IRS) or a taxpayer, is corrected by 
adjustments in the taxable year in which the conditions known to exist 
at the end of that taxable year changed thereby resulting in a 
redetermination of the useful life under Sec.  1.167(a)-1(b) (or if the 
period of limitation for assessment under section 6501(a) has expired 
for that taxable year, in the first succeeding taxable year open under 
the period of limitation for assessment), and in subsequent taxable 
years. In other situations (for example, the useful life is incorrectly 
determined in the placed-in-service year), the adjustment in the useful 
life, whether initiated by the IRS or a taxpayer, may be corrected by 
adjustments in the earliest taxable year open under the period of 
limitation for assessment under section 6501(a) or the earliest taxable 
year under examination by the IRS but in no event earlier than the 
placed-in-service year of the asset, and in subsequent taxable years. 
However, if a taxpayer initiates the correction in useful life, in lieu 
of filing amended Federal tax returns (for example, because the 
conditions known to exist at the end of a prior taxable year changed 
thereby resulting in a redetermination of the useful life under Sec.  
1.167(a)-1(b)), the taxpayer may correct the adjustment in useful life 
by adjustments in the current and subsequent taxable years.
    (v) Change in placed-in-service date. This paragraph 
(e)(2)(ii)(d)(5)(v) applies to a change in the placed-in-service date 
of a depreciable or amortizable asset that is not a change in method of 
accounting under paragraph (e)(2)(ii)(d) of this section. For this 
change in placed-in-service date, no section 481 adjustment is required 
or permitted. The change in placed-in-service date, whether initiated 
by the IRS or a taxpayer, may be corrected by adjustments in the 
earliest taxable year open under the period of limitation for 
assessment under section 6501(a) or the earliest taxable year under 
examination by the IRS but in no event earlier than the placed-in-
service year of the asset, and in subsequent taxable years. However, if 
a taxpayer initiates the change in placed-in-service date, in lieu of 
filing amended Federal tax returns, the taxpayer may correct the 
placed-in-service date by adjustments in the current and subsequent 
taxable years.
    (iii) Examples. The rules of this paragraph (e) are illustrated by 
the following examples:

    Example 1. Although the sale of merchandise is an income 
producing factor, and therefore inventories are required, a taxpayer 
in the retail jewelry business reports his income on the cash 
receipts and disbursements method of accounting. A change from the 
cash receipts and disbursements method of accounting to the accrual 
method of accounting is a change in the overall plan of accounting 
and thus is a change in method of accounting.

    Example 2. A taxpayer in the wholesale dry goods business 
computes its income and expenses on the accrual method of accounting 
and files its Federal income tax returns on such basis except for 
real estate taxes which have been reported on the cash receipts and 
disbursements method of accounting. A change in the treatment of 
real estate taxes from the cash receipts and disbursements method to 
the accrual method is a change in method of accounting because such 
change is a change in the treatment of a material item within his 
overall accounting practice.

    Example 3. A taxpayer in the wholesale dry goods business 
computes its income and expenses on the accrual method of accounting 
and files its Federal income tax returns on such basis. Vacation pay 
has been deducted in the year in which paid because the taxpayer did 
not have a completely vested vacation pay plan, and, therefore, the 
liability for payment did not accrue until that year. Subsequently, 
the taxpayer adopts a completely vested vacation pay plan that 
changes its year for accruing the deduction from the year in which 
payment is made to the year in which the liability to make the 
payment now arises. The change for the year of deduction of the 
vacation pay plan is not a change in method of accounting but 
results, instead, because the underlying facts (that is, the type of 
vacation pay plan) have changed.

    Example 4. From 1968 through 1970, a taxpayer has fairly 
allocated indirect overhead costs to the value of inventories on a 
fixed percentage of direct costs. If the ratio of indirect overhead 
costs to direct costs increases in 1971, a change in the underlying 
facts has occurred. Accordingly, an increase in the percentage in 
1971 to fairly reflect the increase in the relative level of 
indirect overhead costs is not a change in method of accounting but 
is a change in treatment resulting from a change in the underlying 
facts.

    Example 5. A taxpayer values inventories at cost. A change in 
the basis for valuation of inventories from cost to the lower of 
cost or market is a change in an overall practice of valuing items 
in inventory. The change, therefore, is a change in method of 
accounting for inventories.

    Example 6. A taxpayer in the manufacturing business has for many 
taxable years valued its inventories at cost. However, cost has been 
improperly computed since no overhead costs have been included in 
valuing

[[Page 78072]]

the inventories at cost. The failure to allocate an appropriate 
portion of overhead to the value of inventories is contrary to the 
requirement of the Internal Revenue Code and the regulations under 
the Internal Revenue Code. A change requiring appropriate allocation 
of overhead is a change in method of accounting because it involves 
a change in the treatment of a material item used in the overall 
practice of identifying or valuing items in inventory.

    Example 7. A taxpayer has for many taxable years valued certain 
inventories by a method which provides for deducting 20 percent of 
the cost of the inventory items in determining the final inventory 
valuation. The 20 percent adjustment is taken as a ``reserve for 
price changes.'' Although this method is not a proper method of 
valuing inventories under the Internal Revenue Code or the 
regulations under the Internal Revenue Code, it involves the 
treatment of a material item used in the overall practice of valuing 
inventory. A change in such practice or procedure is a change of 
method of accounting for inventories.

    Example 8. A taxpayer has always used a base stock system of 
accounting for inventories. Under this system a constant price is 
applied to an assumed constant normal quantity of goods in stock. 
The base stock system is an overall plan of accounting for 
inventories which is not recognized as a proper method of accounting 
for inventories under the regulations. A change in this practice is, 
nevertheless, a change of method of accounting for inventories.
    Example 9. In 2003, A1, a calendar year taxpayer engaged in the 
trade or business of manufacturing knitted goods, purchased and 
placed in service a building and its components at a total cost of 
$10,000,000 for use in its manufacturing operations. A1 classified 
the $10,000,000 as nonresidential real property under section 
168(e). A1 elected not to deduct the additional first year 
depreciation provided by section 168(k) on its 2003 Federal tax 
return. As a result, on its 2003, 2004, and 2005 Federal tax 
returns, A1 depreciated the $10,000,000 under the general 
depreciation system of section 168(a), using the straight line 
method of depreciation, a 39-year recovery period, and the mid-month 
convention. In 2006, A1 completes a cost segregation study on the 
building and its components and identifies items that cost a total 
of $1,500,000 as section 1245 property. As a result, the $1,500,000 
should have been classified in 2003 as 5-year property under section 
168(e) and depreciated on A1's 2003, 2004, and 2005 Federal tax 
returns under the general depreciation system, using the 200-percent 
declining balance method of depreciation, a 5-year recovery period, 
and the half-year convention. Pursuant to paragraph 
(e)(2)(ii)(d)(2)(i) of this section, A1's change to this 
depreciation method, recovery period, and convention is a change in 
method of accounting. This method change results in a section 481 
adjustment. The useful life exception under paragraph 
(e)(2)(ii)(d)(3)(i) of this section does not apply because the 
assets are depreciated under section 168.

    Example 10. In 2003, B, a calendar year taxpayer, purchased and 
placed in service new equipment at a total cost of $1,000,000 for 
use in its plant located outside the United States. The equipment is 
15-year property under section 168(e) with a class life of 20 years. 
The equipment is required to be depreciated under the alternative 
depreciation system of section 168(g). However, B incorrectly 
depreciated the equipment under the general depreciation system of 
section 168(a), using the 150-percent declining balance method, a 
15-year recovery period, and the half-year convention. In 2010, the 
IRS examines B's 2007 Federal income tax return and changes the 
depreciation of the equipment to the alternative depreciation 
system, using the straight line method of depreciation, a 20-year 
recovery period, and the half-year convention. Pursuant to paragraph 
(e)(2)(ii)(d)(2)(i) of this section, this change in depreciation 
method and recovery period made by the IRS is a change in method of 
accounting. This method change results in a section 481 adjustment. 
The useful life exception under paragraph (e)(2)(ii)(d)(3)(i) of 
this section does not apply because the assets are depreciated under 
section 168.

    Example 11. In May 2003, C, a calendar year taxpayer, purchased 
and placed in service equipment for use in its trade or business. C 
never held this equipment for sale. However, C incorrectly treated 
the equipment as inventory on its 2003 and 2004 Federal tax returns. 
In 2005, C realizes that the equipment should have been treated as a 
depreciable asset. Pursuant to paragraph (e)(2)(ii)(d)(2) of this 
section, C's change in the treatment of the equipment from inventory 
to a depreciable asset is a change in method of accounting. This 
method change results in a section 481 adjustment.

    Example 12. Since 2003, D, a calendar year taxpayer, has used 
the distribution fee period method to amortize distributor 
commissions and, under that method, established pools to account for 
the distributor commissions (for further guidance, see Rev. Proc. 
2000-38 (2000-2 C.B. 310) and Sec.  601.601(d)(2)(ii)(b) of this 
chapter). A change in the accounting of distributor commissions 
under the distribution fee period method from pooling to single 
asset accounting is a change in method of accounting pursuant to 
paragraph (e)(2)(ii)(d)(2)(vi) of this section. This method change 
results in no section 481 adjustment because the change is from one 
permissible method to another permissible method.

    Example 13. Since 2003, E, a calendar year taxpayer, has 
accounted for items of MACRS property that are mass assets in pools. 
Each pool includes only the mass assets that are placed in service 
by E in the same taxable year. E is able to identify the cost basis 
of each asset in each pool. None of the pools are general asset 
accounts under section 168(i)(4) and the regulations under section 
168(i)(4). E identified any dispositions of these mass assets by 
specific identification. Because of changes in E's recordkeeping in 
2006, it is impracticable for E to continue to identify disposed 
mass assets using specific identification. As a result, E wants to 
change to a first-in, first-out method under which the mass assets 
disposed of in a taxable year are deemed to be from the pool with 
the earliest placed-in-service year in existence as of the beginning 
of the taxable year of each disposition. Pursuant to paragraph 
(e)(2)(ii)(d)(2)(vii) of this section, this change is a change in 
method of accounting. This method change results in no section 481 
adjustment because the change is from one permissible method to 
another permissible method.

    Example 14. In August 2003, F, a calendar year taxpayer, 
purchased and placed in service a copier for use in its trade or 
business. F incorrectly classified the copier as 7-year property 
under section 168(e). F elected not to deduct the additional first 
year depreciation provided by section 168(k) on its 2003 Federal tax 
return. As a result, on its 2003 and 2004 Federal tax returns, F 
depreciated the copier under the general depreciation system of 
section 168(a), using the 200-percent declining balance method of 
depreciation, a 7-year recovery period, and the half-year 
convention. In 2005, F realizes that the copier is 5-year property 
and should have been depreciated on its 2003 and 2004 Federal tax 
returns under the general depreciation system using a 5-year 
recovery period rather than a 7-year recovery period. Pursuant to 
paragraph (e)(2)(ii)(d)(2)(i) of this section, F's change in 
recovery period from 7 to 5 years is a change in method of 
accounting. This method change results in a section 481 adjustment. 
The useful life exception under paragraph (e)(2)(ii)(d)(3)(i) of 
this section does not apply because the copier is depreciated under 
section 168.

    Example 15. In 2004, G, a calendar year taxpayer, purchased and 
placed in service an intangible asset that is not an amortizable 
section 197 intangible and that is not described in section 167(f). 
G amortized the cost of the intangible asset under section 167(a) 
using the straight line method of depreciation and a determinable 
useful life of 13 years. The safe harbor useful life of 15 or 25 
years under Sec.  1.167(a)-3(b) does not apply to the intangible 
asset. In 2008, because of changing conditions, G changes the 
remaining useful life of the intangible asset to 2 years. Pursuant 
to paragraph (e)(2)(ii)(d)(3)(i) of this section, G's change in 
useful life is not a change in method of accounting because the 
intangible asset is depreciated under section 167 and G is not 
changing to or from a useful life that is specifically assigned by 
the Internal Revenue Code, the regulations under the Internal 
Revenue Code, or other guidance published in the Internal Revenue 
Bulletin.

    Example 16. In July 2003, H, a calendar year taxpayer, purchased 
and placed in service ``off-the-shelf'' computer software and a new 
computer. The cost of the new computer and computer software are 
separately stated. H incorrectly included the cost of this software 
as part of the cost of the computer, which is 5-year property under 
section 168(e). On its 2003 Federal tax return, H elected to 
depreciate its 5-year property placed in service in 2003 under the 
alternative depreciation system of section 168(g) and H elected not 
to deduct the additional first year depreciation provided by section 
168(k). The class life for a computer is 5 years. As a result, 
because H included the cost of the computer software as part of the 
cost of the computer hardware, H

[[Page 78073]]

depreciated the cost of the software under the alternative 
depreciation system, using the straight line method of depreciation, 
a 5-year recovery period, and the half-year convention. In 2005, H 
realizes that the cost of the software should have been amortized 
under section 167(f)(1), using the straight line method of 
depreciation, a 36-month useful life, and a monthly convention. H's 
change from 5-years to 36-months is a change in method of accounting 
because H is changing to a useful life that is specifically assigned 
by section 167(f)(1). The change in convention from the half-year to 
the monthly convention also is a change in method of accounting. 
Both changes result in a section 481 adjustment.

    Example 17. On May 1, 2003, I2, a calendar year taxpayer, 
purchased and placed in service new equipment at a total cost of 
$500,000 for use in its business. The equipment is 5-year property 
under section 168(e) with a class life of 9 years and is qualified 
property under section 168(k)(2). I2 did not place in service any 
other depreciable property in 2003. Section 168(g)(1)(A) through (D) 
do not apply to the equipment. I2 intended to elect the alternative 
depreciation system under section 168(g) for 5-year property placed 
in service in 2003. However, I2 did not make the election. Instead, 
I2 deducted on its 2003 Federal tax return the 30-percent additional 
first year depreciation attributable to the equipment and, on its 
2003 and 2004 Federal tax returns, depreciated the remaining 
adjusted depreciable basis of the equipment under the general 
depreciation system under 168(a), using the 200-percent declining 
balance method, a 5-year recovery period, and the half-year 
convention. In 2005, I2 realizes its failure to make the alternative 
depreciation system election in 2003 and files a Form 3115, 
``Application for Change in Accounting Method,'' to change its 
method of depreciating the remaining adjusted depreciable basis of 
the 2003 equipment to the alternative depreciation system. Because 
this equipment is not required to be depreciated under the 
alternative depreciation system, I2 is attempting to make an 
election under section 168(g)(7). However, this election must be 
made in the taxable year in which the equipment is placed in service 
(2003) and, consequently, I2 is attempting to make a late election 
under section 168(g)(7). Accordingly, I2's change to the alternative 
depreciation system is not a change in accounting method pursuant to 
paragraph (e)(2)(ii)(d)(3)(iii) of this section. Instead, I2 must 
submit a request for a private letter ruling under Sec.  301.9100-3 
of this chapter, requesting an extension of time to make the 
alternative depreciation system election on its 2003 Federal tax 
return.

    Example 18. On December 1, 2004, J, a calendar year taxpayer, 
purchased and placed in service 20 previously-owned adding machines. 
For the 2004 taxable year, J incorrectly classified the adding 
machines as items in its ``suspense'' account for financial and tax 
accounting purposes. Assets in this suspense account are not 
depreciated until reclassified to a depreciable fixed asset account. 
In January 2006, J realizes that the cost of the adding machines is 
still in the suspense account and reclassifies such cost to the 
appropriate depreciable fixed asset account. As a result, on its 
2004 and 2005 Federal tax returns, J did not depreciate the cost of 
the adding machines. Pursuant to paragraph (e)(2)(ii)(d)(2) of this 
section, J's change in the treatment of the adding machines from 
nondepreciable assets to depreciable assets is a change in method of 
accounting. The placed-in-service date exception under paragraph 
(e)(2)(ii)(d)(3)(v) of this section does not apply because the 
adding machines were incorrectly classified in a nondepreciable 
suspense account. This method change results in a section 481 
adjustment.

    Example 19. In December 2003, K, a calendar year taxpayer, 
purchased and placed in service equipment for use in its trade or 
business. However, K did not receive the invoice for this equipment 
until January 2004. As a result, K classified the equipment on its 
fixed asset records as being placed in service in January 2004. On 
its 2004 and 2005 Federal tax returns, K depreciated the cost of the 
equipment. In 2006, K realizes that the equipment was actually 
placed in service during the 2003 taxable year and, therefore, 
depreciation should have began in the 2003 taxable year instead of 
the 2004 taxable year. Pursuant to paragraph (e)(2)(ii)(d)(3)(v) of 
this section, K's change in the placed-in-service date of the 
equipment is not a change in method of accounting.
* * * * *
    (4) Effective date--(i) In general. Except as provided in 
paragraphs (e)(3)(iii) and (e)(4)(ii) of this section, paragraph (e) of 
this section applies on or after December 30, 2003. For the 
applicability of regulations before December 30, 2003, see Sec.  1.446-
1(e) in effect prior to December 30, 2003 (Sec.  1.446-1(e) as 
contained in 26 CFR part 1 edition revised as of April 1, 2003).
    (ii) Changes involving depreciable or amortizable assets. With 
respect to paragraph (e)(2)(ii)(d) of this section, paragraph 
(e)(2)(iii) Examples 9 through 19 of this section, and the language 
``certain changes in computing depreciation or amortization (see 
paragraph (e)(2)(ii)(d) of this section)'' in the last sentence of 
paragraph (e)(2)(ii)(a) of this section--
    (A) For any change in depreciation or amortization that is a change 
in method of accounting, this section applies to such a change in 
method of accounting made by a taxpayer for a depreciable or 
amortizable asset placed in service by the taxpayer in a taxable year 
ending on or after December 30, 2003; and
    (B) For any change in depreciation or amortization that is not a 
change in method of accounting, this section applies to such a change 
made by a taxpayer for a depreciable or amortizable asset placed in 
service by the taxpayer in a taxable year ending on or after December 
30, 2003.


Sec.  1.446-1T  [Removed]

0
Par. 7. Section 1.446-1T is removed.

0
Par. 8. Section 1.1016-3 is amended by revising paragraphs (h) and (j) 
to read as follows:


Sec.  1.1016-3  Exhaustion, wear and tear, obsolescence, amortization, 
and depletion for periods since February 28, 1913.

* * * * *
    (h) Application to a change in method of accounting. For purposes 
of determining whether a change in depreciation or amortization for 
property subject to section 167, 168, 197, 1400I, 1400L(c), to section 
168 prior to its amendment by the Tax Reform Act of 1986 (100 Stat. 
2121) (former section 168), or to an additional first year depreciation 
deduction provision of the Internal Revenue Code (for example, section 
168(k), 1400L(b), or 1400N(d)) is a change in method of accounting 
under section 446(e) and the regulations under section 446(e), section 
1016(a)(2) does not permanently affect a taxpayer's lifetime income.
* * * * *
    (j) Effective date--(1) In general. Except as provided in paragraph 
(j)(2) of this section, this section applies on or after December 30, 
2003. For the applicability of regulations before December 30, 2003, 
see Sec.  1.1016-3 in effect prior to December 30, 2003 (Sec.  1.1016-3 
as contained in 26 CFR part 1 edition revised as of April 1, 2003).
    (2) Depreciation or amortization changes. Paragraph (h) of this 
section applies to a change in depreciation or amortization for 
property subject to section 167, 168, 197, 1400I, 1400L(c), to former 
section 168, or to an additional first year depreciation deduction 
provision of the Internal Revenue Code (for example, section 168(k), 
1400L(b), or 1400N(d)) for taxable years ending on or after December 
30, 2003.


Sec.  1.1016-3T  [Removed]

0
Par. 9. Section 1.1016-3T is removed.

Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.

    Approved: December 21, 2006.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 06-9892 Filed 12-22-06; 8:45 am]
BILLING CODE 4830-01-P