Rev. Rul. 69-55

Advice has been requested whether, under the circumstances described below, a taxpayer is entitled to the investment credit provided under section 38 of the Internal Revenue Code of 1954 on its platinum.

The taxpayer is engaged in the manufacture of glass products having special qualities. It uses platinum in its fabricated furnace linings, electrodes, stirrers, crucibles, orifice rings, and other types of equipment for manufacturing glass products. These items (platinum items) are fabricated (or refabricated) for the taxpayer by a refinery, in accordance with the taxpayer's instructions, from sponge platinum purchased from the refinery, or from sponge platinum obtained from the salvage of platinum items no longer useful in the taxpayer's manufacturing of glass. These fabricated (or refabricated) platinum items have useful lives that vary from 6 months to 3 years.

The taxpayer maintains one asset account for platinum. The cost of its purchased sponge platinum, the cost of refining (or re-refining), and the cost of fabricating (or refabricating), of all its platinum and platinum items, are charged to the account. No depreciation reserve account is maintained. When a fabricated or (refabricated) platinum item, no longer useful in manufacturing glass, is re-refined into sponge platinum (salvaged), the difference between the original weight of the sponge platinum used in the item and the weight of the sponge platinum salvaged from the item, multiplied by a weighted average price, results in an amount that is credited to the asset account for platinum, and the same amount is deducted as an operating expense for that taxable year. The difference between the original weight of the sponge platinum used and its salvaged weight is due to vaporization, erosion, contamination, and losses from refining and fabricating.

Section 38 of the Code allows a credit against Federal income tax for qualified investment in "section 38 property." The determination of what property qualifies as "section 38 property" is made in accordance with the rules provided in section 48 of the Code.

Section 48(a)(1) of the Code provides, in pertinent part, that "section 38 property" means tangible personal property and certain other tangible property. Such term includes only property with respect to which depreciation (or amortization in lieu of depreciation) is allowable with a useful life of 4 years or more.

Section 167(a) of the Code provides, in part, that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear, and obsolescence of property used in the trade or business.

The raw material, platinum in the sponge form, does not depreciate by reason of exhaustion, wear and tear, or obsolescence in the elemental state. When the fabricated items containing platinum are placed in service, those items having a useful life of over one year take on the characteristics of depreciable property. The fabricated items are placed in service when they are put into use in the manufacture of glass by the taxpayer and depreciation begins at that time. Once the platinum is salvaged from the fabricated items by re-refining, a complete life cycle has occurred.

The fabricated platinum items having a useful life of over one year are in the only form that the platinum metal could give rise to a depreciation deduction by the taxpayer in the instant case. Since none of the fabricated platinum items have a useful life to the taxpayer of four years or more, they do not qualify under section 48(a)(1) of the Code as "section 38 property" for investment credit purposes.

Accordingly, the taxpayer in the instant case is not entitled to the investment credit under section 38 of the Code on any of its investment in platinum.