Rev. Rul. 74-455

Advice has been requested whether, under the circumstances described below, a taxpayer has complied with the provisions of Rev. Proc. 74-11, 1974-1 C.B. 420, in making a change in accounting for salvage and removal costs resulting from property retirements.

A taxpayer engaged in manufacturing, for years prior to the year in which a change in accounting method was requested, maintained an open-end multiple asset account for certain plant equipment and had numerous acquisitions and retirements from this account. The taxpayer accounted for salvage from normal retirements by crediting the appropriate depreciation reserve with all receipts from salvage and charging the depreciation reserve with the cost of removing the assets, a practice that, in this instance, clearly reflected income. The taxpayer had not changed its method of depreciation with respect to the multiple asset account within the ten taxable years immediately preceding the year in which the change was requested. In addition, the taxpayer's depreciation allowance determination was not in accordance with section 1.167(a)-11 of the Income Tax Regulations nor under the authority of section 167(1) of the Internal Revenue Code of 1954.

The taxpayer filed a timely Application for Change in Accounting Method, Form 3115, with the Director of the Internal Revenue Service Center at which the taxpayer's returns are filed in accordance with Rev. Proc. 74-11. The taxpayer sought to change the method of accounting for salvage and removal costs due to retirements of plant equipment from the aforementioned multiple asset account to a method whereby the gross proceeds from salvage were to be reported as taxable income and the cost of removal deducted as expense when paid or incurred.

The purpose of Rev. Proc. 74-11 is to provide "an administrative procedure whereby taxpayers may expeditiously obtain consent to change their methods of depreciation accounting to certain other methods for Federal income tax purposes." A taxpayer can make such a change by filing a timely application on Form 3115 with the Director of the Internal Revenue Service Center for the taxable year in which the change is to become effective. If a taxpayer has complied with all the conditions of the procedure, it can be assumed that the change was granted unless a letter is received from the Director of the Internal Revenue Service Center denying permission because the Form 3115 was not timely filed.

In general, Rev. Proc. 74-11 applies to certain specified changes from one method of computing depreciation to another. Among the specified changes is that set forth in section 4.01(g) of Rev. Proc. 74-11, which permits:

Any change in the treatment of salvage proceeds from retirements of assets as set forth in section 1.167(a)-8(e)(2) of the regulations. Such a change may be made under this Revenue Procedure only if the change is applied to all items in the account for which the change is being made.

Section 1.167(a)-1(c) of the regulations provides, in part, that when an asset is retired or disposed of, appropriate adjustments shall be made in the asset and depreciation reserve accounts. For example, the amount of the salvage adjusted for the costs of removal may be credited to the depreciation reserve.

Section 1.167(a)-8(e)(2) of the regulations cites two acceptable methods of the treatment of receipts from salvage. One is taxpayer's former method of crediting the depreciation reserve, and the other is taxpayer's present method of reporting all receipts from salvage as taxable income.

The taxpayer's former practice of charging the depreciation reserve with removal costs and concurrently crediting the reserve with salvage is consistent with the provisions of section 1.167(a)-1(c) of the regulations. The change to reporting salvage proceeds as taxable income requires a change in the treatment of removal costs since the treatment of removal costs must be consistent with the treatment of salvage proceeds. Thus, removal costs can no longer be charged to the depreciation reserve but must be charged to expense and properly treated as deductions against income.

Accordingly, in the instant case, the taxpayer has complied with the provisions of Rev. Proc. 74-11.