Academic journal article Journal of Accountancy

MACRS Reclassification Not Change in Accounting Method

Academic journal article Journal of Accountancy

MACRS Reclassification Not Change in Accounting Method

Article excerpt

IRC section 446(e) requires that a taxpayer secure IRS consent to change its method of accounting. Treasury regulations section 1.446-1(e)(2)(i) specifies that a taxpayer do this before computing its income under the new method. The rule also requires a taxpayer to file form 3115 with the IRS commissioner during the taxable year in which it wants to make the change. However, regulations section 1.446-1(e)(2)(ii)(b) says an adjustment in the useful life of a depreciable asset is not a change in accounting method.

Brookshire Brothers Holding Inc. operated grocery stores in Texas. The holding company and its subsidiaries filed a consolidated tax return. Brookshire used the modified accelerated cost recovery system (MACRS) for purposes of recovering the cost of the tangible assets used in its businesses. In 1991 Brookshire began constructing gas stations at its grocery store locations. It identified the stations as nonresidential real property, reporting depreciation on a straight-line basis over 31 1/2 years and then 39 years after the recovery period changed.

In response to the Industry Specialization Program Coordinated Issue Paper for Petroleum and Retail Industries (ISP), which the IRS issued effective March 1, 1995, Brookshire filed amended returns for 1993, 1994 and 1995. On these returns Brookshire reclassified the gas stations as 15-year property and recalculated the depreciation deduction using the 150%-declining-balance MACRS method, as specified in the ISP. The company continued this treatment on its 1996 and 1997 tax returns.

The IRS audited the 1996 and 1997 returns and issued a deficiency notice, asserting Brookshire had to reduce its MACRS deductions for those years because it had changed its accounting method without obtaining prior consent. …

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