Rev. Rul. 57-352

Advice has been requested regarding the propriety of employing the declining balance method of computing depreciation with respect to new or used tangible property acquired prior to January 1, 1954, and used tangible property acquired after December 31, 1953.

Section 167(a) of the Internal Revenue Code of 1954 allows as a depreciation deduction a reasonable allowance for exhaustion, wear and tear (including a reasonable allowance for obsolescence) of property used in the trade or business, or of property held for the production of income. Subsection (b) of section 167 provides for the use of certain methods and rates of computing depreciation for taxable years ending after December 31, 1953.

Section 1.167(b)-(0)(b) of the Income Tax Regulations provides in part that `Methods previously found adequate to produce a reasonable allowance under the Internal Revenue Code of 1939 or prior revenue laws will, if used consistently by the taxpayer, continue to be acceptable under section 167(a). Examples of such methods which continue to be acceptable are the straight line method, the declining balance method with the rate limited to 150 percent of the applicable straight line rate * * *.'

I.T. 3818, C.B. 1946-2, 42, holds that the declining balance method of computing depreciation will be approved provided it accords with the method of accounting regularly employed in keeping the books of the taxpayer and results in reasonable depreciation allowances and proper reflection of net income for the taxable year or years involved. It is further held therein that methods of computing depreciation are methods of accounting, and that a change in the method of accounting may be made only with the Commissioner's consent.

Since section 167(b)(2) of the Internal Revenue Code of 1954 provides for the use of the declining balance method of computing the allowance for depreciation on property acquired after December 31, 1953, that qualifies under section 167(c) for the use of such method, the application of I.T. 3818 is restricted to new or used property acquired prior to January 1, 1954, and used property acquired after December 31, 1953.

Accordingly, for taxable years ending after December 31, 1953, the declining balance method of computing depreciation, using a rate not in excess of one and one-half times (150 percent) the applicable straight line rate, may continue to be used for new or used tangible property acquired prior to January 1, 1954, and used tangible property acquired after December 31, 1953, provided such method results in a reasonable allowance for depreciation, and

(a) was elected by a new taxable entity in an initial return, or

(b) permission to use such method has been granted by the Commissioner, or

(c) it was elected in the first return filed in which depreciation was sustained, or

(d) for taxable years ending after December 31, 1953, it was elected in the return for the first year in which the property was subject to the allowance for depreciation regardless of the method of computing depreciation employed for other depreciable property.

Otherwise, permission to use such method must be obtained.