Rev. Proc. 67-40

SECTION 1. PURPOSE.

This Revenue Procedure provides 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. Taxpayers complying with the provisions hereof will be deemed to have obtained the consent of the Commissioner of Internal Revenue to change their method of depreciation accounting.

SEC. 2. BACKGROUND.

A taxpayer, before changing his method of depreciation accounting for Federal income tax purposes, is required to obtain the consent of the Commissioner under the provisions of section 1.446-1(e)(3) of the Income Tax Regulations and is required to file an application on Form 3115, Application for Change in Accounting Method, with the Commissioner within the first ninety days of the taxable year in which the change is to become effective.

SEC. 3. APPLICATION.

.01 Subject to the following conditions a taxpayer desiring to change his method of depreciation accounting set forth in section 4 of this Revenue Procedure may do so by filing an application on Form 3115 with the District Director of Internal Revenue for the district in which he files his return. Reference to this Revenue Procedure should be made a part of his application. The application shall be filed within the first ninety days of the taxable year in which the change is to become effective and include the following information with respect to the property which is the subject of the change:

(a) Date of acquisition;

(b) Whether or not the "original use" (the first use to which the property is put) of the property commenced with the taxpayer and commenced after December 31, 1953;

(c) Location of the property;

(d) Character of the property;

(e) Cost or other basis of the property and adjustments thereto;

(f) Amounts recovered through depreciation and other allowances;

(g) Estimated salvage value; and

(h) Estimated remaining useful life of property to the taxpayer.

.02 Unless a letter is received by the taxpayer from the District Director denying permission because the Form 3115 is not timely filed, it may be assumed that the change has been granted provided the taxpayer has complied with all of the provisions of this Revenue Procedure.

.03 The application of the terms and conditions of this Revenue Procedure as well as the computations resulting from the change, are subject to verification by the District Director upon examination of the taxpayer's Federal income tax return.

SEC. 4. CHANGES IN METHODS COVERED BY THIS REVENUE PROCEDURE.

.01 The following changes in method of depreciation are covered by this Revenue Procedure. Taxpayers desiring to change their methods of depreciation accounting under circumstances other than those following must follow the procedures outlined in section 7.03, below:

(a) From the straight line method to the sum of years-digits, sinking fund, unit-of-production, or declining balance method using any proper percentage of the straight line rate.

(b) From the declining balance method using any percentage of the straight line rate, to the sum of years-digits method or the sinking fund method.

(c) From the sum of years-digits method to the sinking fund method, or to the declining balance method using any proper percentage of the straight line rate.

(d) From the unit-of-production method to the straight line method.

(e) From the sinking fund method to the straight line method, unit-of-production method, sum of years-digits method or declining balance method using any proper percentage of the straight line rate.

(f) From the declining balance method (150 percent) as described in Revenue Ruling 57-352, C.B. 1957-2, 150, or from the sum of the years-digits method to the straight line method.

(g) From the declining balance method using any percentage of the straight line rate to the declining balance method using a different proper percentage of the straight line rate or any change in the interest factor used in connection with a compound interest or sinking fund method.

(h) Any change in the treatment of salvage proceeds from retirement 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.

(i) Any change in averaging convention as set forth in section 1.167(a)-10(b) of the regulations. However, as specifically provided in section 1.167(a)-10(b) of the regulations, in any year in which an averaging convention substantially distorts the depreciation allowance for the taxable year, it may not be used.

SEC. 5. CONDITIONS FOR EFFECTING THE CHANGE.

The following conditions must be adhered to where appropriate, in order for the change to become effective:

.01 Any change from one method of depreciation to another method under this Revenue Procedure must result in a reasonable allowance for depreciation in accordance with the provisions, conditions and limitations of section 167 of the Internal Revenue Code of 1954 and regulations thereunder.

.02 The basis for depreciation, as of the taxable year or period immediately preceding the taxable year of change, shall be the adjusted basis of the property determined under section 1016 of the Code and regulations thereunder.

.03 The rate of depreciation for property changed to the straight line or sum of years-digits methods of depreciation shall be based on the remaining useful life of such property.

.04 For changes in method of depreciation to the declining balance method, the rate of depreciation applicable to the property shall be based on the useful life of such property from the date of acquisition, and not the expected remaining life from the date the change becomes effective.

.05 For changes in method of depreciation to the sum of years-digits or declining balance method in excess of 150 percent of the straight line rate, the property must meet the qualifications of section 1.167(c) of the regulations.

.06 The effective year of change will be the taxable year or period within which the application for change is filed during the first ninety days in accordance with section 1.446-1(e)(3) of the regulations.

.07 The taxpayer must attach a copy of the application, Form 3115, to his income tax return filed for the taxable year of change.

SEC. 6. FACTUAL MATTERS SUBJECT TO REVIEW BY DISTRICT DIRECTOR.

The following factors involved in depreciation computations are matters of fact and subject to review and verification by the District Director upon examination of the taxpayer's income tax return.

(a) Useful life

(b) Salvage value

(c) Adjusted basis

(d) Interest factors under the sinking fund method

(e) Estimated reserves under the unit-of-production method.

SEC. 7. TAXPAYERS NOT COVERED BY THIS REVENUE PROCEDURE.

.01 This Revenue Procedure applies only to those changes in method of depreciation specifically covered in section 4 above.

.02 This Revenue Procedure does not apply to an account where a change in method of depreciation was made by a taxpayer to such account at any time within the ten taxable years immediately preceding the taxable year except for changes permitted to be made in applying the provisions of Revenue Procedure 62-21, C.B. 1962-2, 418.

.03 For changes in method of depreciation to which this Revenue Procedure does not apply, application on Form 3115 must be filed within the first ninety days of the taxable year for which the change is desired with the Commissioner of Internal Revenue, Washington, D.C. 20224.

SEC. 8. RECORDS.

Taxpayers must maintain records so that the District Director may verify the necessary data concerning the proposed change in method of depreciation accounting.

SEC. 9. COMPLIANCE WITH CONDITIONS.

Taxpayers making a change under this Revenue Procedure without complying with all the conditions herein will be deemed to have initiated the change without having obtained the consent of the Commissioner.

SEC. 10. EFFECTIVE DATE.

This Revenue Procedure shall be effective on October 23, 1967, the date of publication in the Internal Revenue Bulletin.

SEC. 11. INQUIRIES.

Inquiries in regard to this Revenue Procedure should refer to its number and be addressed to the Commissioner of Internal Revenue, Attention T: I: E, Washington, D.C. 20224.