Is property reclassification under MACRS an accounting-method change?

• Author: Sair, Edward A.
• Position: Modified accelerated cost recovery system

The Tax Court recently decided that a reclassification of properties under the modified accelerated cost recovery system (MACRS) was not an accounting-method change under Sec. 446, because it was excepted by regulation (Brookshire Bros., TC Memo 2001-150). It is uncertain whether the IRS will acquiesce in this decision. Until its response is known or additional cases are decided, taxpayers that want to make a MACRS class-life reclassification should consider protecting their positions by filing both a request for an accounting-method change and amended returns.

Facts

Beginning in September 1991, Brookshire Bros. began to build gas station properties accessible through the parking lots of certain of its grocery stores. The company classified the gas stations as nonresidential real property with 31.5- or 39-year recovery periods on its 1993-1995 returns. In 1996, the company filed amended returns for those years, reclassifying the gas stations as 15-year property, citing an IRS Industry Specialization Program (ISP) paper with an effective date of March 1, 1995 allowing this treatment. Accordingly, Brookshire's original returns for 1996 and 1997 depreciated the gas stations as 15-year property.

The Service issued refunds for the amount the taxpayer claimed in the amended returns for years ended in 1993 and 1994 and a partial refund of the amount claimed for the year ended in 1995. However, it subsequently examined Brookshire's 1996 and 1997 returns and issued a deficiency notice in December 1998. The IRS determined that Brookshire's deductions for depreciation had to be decreased; by treating the gas stations as 15-year property, it had engaged in an unauthorized accounting-method change. The Service never asserted that the gas stations could not be properly classified as 15-year property under the MACRS rules.

Accounting-Method Changes

Sec. 446(a) sets forth the general rule that, "[t]axable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books." Sec. 446(e) then provides the particular standard governing changes in accounting methods as follows:

Requirement Respecting Change of Accounting Method.--Except as otherwise expressly provided in this chapter, a taxpayer who changes the method of accounting on the basis of which he regularly computes his income in keeping his books shall, before computing his taxable income under the new method, secure the...