Change in depreciable life is accounting-method change.

• Author: Kane, Robert F.

Hospital Corporation of America (HCA), 109 TC 21 (1997), started a dramatic shift in how taxpayers compute depreciation. HCA convinced the court that breaking out specific portions of the cost of a building and assigning them shorter depreciable lives did not violate the Economic Recovery Tax Act of 1981's ban on component depreciation, but was an appropriate segregation of costs under the old investment tax credit rules. By the time the IRS acquiesced in the case (1999-2 CB xvi), "cost segregation" had started to become more prevalent.

Since then, taxpayers have been able to obtain cost segregation studies and apply for an accounting-method change to "catch up" any missed depreciation from assigning longer depreciable lives to certain assets. The IRS allowed taxpayers to obtain automatic approval for such changes; in 2002, it made them even more desirable, by permitting taxpayers to deduct catch-up depreciation in one year, rather than spreading the benefit over what had historically been a four-year period. In several recent cases, however, taxpayers who were able to obtain a better result by treating the depreciation change as the correction of an error, rather than as an accounting method change, challenged the latter approach by filing amended returns.

General Rule

Generally, an "accounting method" affects when something is deductible, not whether it is deductible. Sec. 446(c) grants Treasury the authority to issue legislative regulations defining permissible accounting methods; Sec. 446(e) further provides that taxpayers seeking to switch accounting methods must seek the IRS's permission.

Congress's grant of authority to issue "legislative" regulations meant that the IRS had the ability not only to interpret the law on accounting methods, but also, when Congress had provided little guidance, to create the law. Regs. Sec. 1.446-1 does just that. It specifies Congress's general rules for accounting methods and then fills in some of the gaps.

Brookshire Brothers

In Brookshire Brothers Holding, Inc., 320 F3d 507 (2003), the taxpayer had assigned 39- or 31.5-year depreciable lives to some gas stations. After depreciating them for several years, the taxpayer, relying on an IRS Industry Specialization Program position paper, determined that the gas stations should have been depreciated using 15-year lives. The taxpayer filed amended returns for the previous three years to claim 15-year depreciation.

The IRS challenged this; based on its...