SECTION 2. BACKGROUND

.01 A change from not claiming the depreciation or amortization allowable (hereafter, depreciation means depreciation or amortization) to claiming the depreciation allowable is a change in method of accounting for which the consent of the Commissioner of Internal Revenue is required. Sections

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§ 168, § 197, or § 168 prior to its amendment in 1986 (former § 168); and (3) is held by the taxpayer as of the beginning of the year of change.

.02 Non-application of this revenue procedure . This revenue procedure does not apply to:

(1) Any property to which § 1016(a)(3) (generally relating to property held by a tax-exempt organization) applies;

(2) Any intangible property subject to § 167, except for property subject to § 167(f) (pertaining to certain property excluded from § 197);

(3) Any property for which a taxpayer is seeking either to revoke a timely election, or to make a late election, under § 167, § 168, former § 168, or § 13261(g)(2) or (3) of the Revenue Reconciliation Act of 1993 (the ‘‘1993 Act’’), 1993–3 C.B. 1, 128 (relating to amortizable § 197 intangibles). A taxpayer may request consent to revoke or make the election by submitting a request for a letter ruling under Rev. Proc. 96–1, 1996–1 I.R.B. 8 (or any successor);

(4) Except for property subject to § 167(f), any property subject to § 167 for which a taxpayer is changing only the estimated useful life of the property. A change in the estimated useful life of property subject to § 167 must be made prospectively. See, e.g., § 1.167(b)–2(c);

(5) Any depreciable property that changes use but continues to be owned by the same taxpayer. See, e.g., § 168(i)(5);

(6) Any property for which a taxpayer has claimed depreciation in excess of the depreciation allowable;

(7) Any change in method of accounting involving a change from deducting the cost or other basis of any property as an expense to capitalizing and depreciating the cost or other basis;

(8) Any change in method of accounting involving a change from one permissible method of accounting for the property to another permissible method of accounting for the property. For example, a:

(a) Change from the straight-line method of depreciation to the income forecast method of depreciation for videocassettes. See Rev. Rul. 89–62, 1989–1 C.B. 78; or (b) Change from charging the depreciation reserve with costs of removal and crediting the depreciation

reserve with salvage proceeds to deducting costs of removal as an expense and including salvage proceeds in taxable income. See Rev. Rul. 74–455, 1974–2 C.B. 63; or (9) Any change in method of accounting for an item of income or deduction other than depreciation even if a taxpayer’s present method of accounting may have resulted in the taxpayer claiming less than the depreciation allowable. For example, a change in accounting method involving a:

(a) Change in inventory costs (for example, when property is reclassified from inventory property to depreciable property); or

(b) Change in the character of a transaction from sale to lease.

.03 Taxpayer under criminal inves- tigation or proceeding . If a criminal investigation or proceeding is pending concerning (1) any issue directly or indirectly related to a taxpayer’s federal tax liability for any taxable year, or (2) the possibility of false or fraudulent statements made by the taxpayer regarding any issue related to the taxpayer’s federal tax liability for any taxable year, this revenue procedure does not apply to the taxpayer.

.04 Procedures available when a method change may not be made under this revenue procedure . If a change in accounting method is not permitted under this revenue procedure solely by reason of section 3.02(1), 3.02(2), 3.02(6), 3.02(7), 3.02(8), or 3.02(9) of this revenue procedure, a taxpayer must file a Form 3115 in accordance with the requirements of either Rev. Proc. 92–20 (or any successor) or any other applicable revenue procedure pertaining to the method change. Thus, for example, if a taxpayer wants to change from claiming more than the depreciation allowable on some items of property but also opts to use this revenue procedure to change from claiming less than the depreciation allowable on other items of property, the taxpayer must file two Forms 3115—one Form 3115 under Rev. Proc. 92–20 (or any successor) for the over-depreciated property and one Form 3115 under this revenue procedure for the underdepreciated property. The taxpayer, however, files one Form 3115 if the taxpayer uses Rev. Proc. 92–20 (or any successor) to change the method of accounting for both the under- and over-depreciated properties.

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