Rev. Rul. 67-49

Advice has been requested whether a taxpayer may select an accelerated method of depreciation rather than the straight line method in the situation described below.

The taxpayer, a corporation, leased unimproved land from its principal stockholders for a period of 20 years and built a building which had a 40-year useful life. The taxpayer claimed a deduction for amortization of the building cost over the term of the ground lease (20 years). However, because the taxpayer-lessee and the lessor (stockholders) are related within the meaning of section 178(b)(2) of the Internal Revenue Code of 1954, amortization over the term of the lease is not allowable, but for depreciation purposes the use life of 40 years must be used. Section 1.178-1(d)(1)(i) of the Income Tax Regulations.

During an examination of taxpayer's Federal income tax return, the amortization claimed was disallowed and the question then arose as to whether the taxpayer may select an accelerated method of depreciation rather than the straight line method.

Section 1.167(a)-10(a) of the regulations provides as follows:

A taxpayer should deduct the proper depreciation allowance each year and may not increase his depreciation allowances in later years by reason of his failure to deduct any depreciation allowance or of his action in deducting an allowance plainly inadequate under the known facts in prior years. The inadequacy of the depreciation allowance for property in prior years shall be determined on the basis of the allowance method of depreciation used by the taxpayer for such property or under the straight line method if no allowance has ever been claimed for such property. The preceding sentence shall not be construed as precluding application of any method provided in section 167(b) if taxpayer's failure to claim any allowance for depreciation was due solely to erroneously treating as a deductible expense an item properly chargeable to capital account . Emphasis added.

The exception in section 1.167(a)-10(a) of the regulations (emphasized above) equally applies in the present situation where the taxpayer erroneously amortized its land improvements (the building) instead of depreciating them since in neither case has any allowance for depreciation been claimed under section 167 of the Code.

Accordingly, the taxpayer-lessee may select an acceptable accelerated method of depreciation for computing its allowance for depreciation on its leasehold improvements (the building) rather than the straight line method to correct the amortization error when the error is discovered.

See, however, Revenue Ruling 67-50, page 60, this Bulletin, where a taxpayer erroneously used the sum of the years-digits method of depreciation for `used' property.