SECTION 2. BACKGROUND

.01 Section 162 of the Internal Revenue Code allows a deduction for all ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business. However, § 263(a) prohibits a deduction for capital expenditures. Capital expenditures include the cost of acquisition, construction, or erection of buildings, machinery and equipment, furniture and fixtures, and similar property having a useful life substantially beyond the taxable year. Section 1.263(a)–2(a) of the Income Tax Regulations. These capital expenditures are subject to the allowance for depreciation.

.02 Section 167(a) provides a depreciation allowance for the exhaustion, wear and tear of property used in a trade or business or held for the production of income. The depreciation deduction provided by § 167(a) for tangible property placed in service after 1986 generally is determined under § 168. This section prescribes two methods of accounting for

determining depreciation allowances: (1) the general depreciation system (GDS) in § 168(a); and (2) the alternative depreciation system (ADS) in §168(g). Under either depreciation system, the depreciation deduction is computed by using a prescribed depreciation method, recovery period, and convention. For purposes of either GDS or ADS, the applicable recovery period is determined by reference to class life or by statute.

Rev. Proc. 87–56 (1987–2 C.B. 674) sets forth the class lives of property that are necessary to compute the depreciation allowances under § 168. The revenue procedure establishes two broad categories of depreciable assets: (1) asset classes 00.11 through 00.4 that consist of specific assets used in all business activities; and (2) asset classes 01.1 through 80.0 that consist of assets used in specific business activities.

.03 Several court decisions and revenue rulings have considered the expense-versus-capital expenditure issue regarding truck tires. In W.H. Tompkins Co. v. Commissioner, 47 B.T.A. 292 (1942), the court stated that the recovery of the cost of short-lived truck tires and tubes should not be associated with the depreciation of much longer-lived trucks because the tires and tubes are easily separable from the truck and are not a part of the truck’s mechanism. The court held, therefore, that the cost of truck tires and tubes consumable within the taxable year are currently deductible as an expense in the year of purchase. See also Zelco, Inc. v. Commissioner, 331 F.2d 418, 421 (1st Cir. 1964) (a lessor of trailers and tractors used by interstate motor carriers was not required to treat those vehicles’ tires as a part of the leased vehicles, and the cost of trailer and tractor tires and tubes with an average useful life of 12 months could be deducted currently); Interstate Truck Service, Inc. v. Commissioner, T.C. Memo. 1958–219 (a taxpayer in the motor freight transportation business can currently deduct the cost of tires and tubes on trucks, tractors, and trailers because on average all of the tires and tubes were consumable in less than one year). In Rev. Rul. 59–249 (1959–2 C.B. 55), the Service announced that it would follow the holdings of Tompkins and Interstate for tires purchased on new commercial trucking

April 29, 2002 802 2002–17 I.R.B.

tires is a change in method of accounting to which §§ 446 and 481 apply.

.02 Issue Not Under Consideration or Not Pending . If a taxpayer within the scope of this revenue procedure wants to change to the original tire capitalization method for its first or second taxable year ending on or after December 31, 2001, (year of change) and the treatment of its qualifying vehicle’s original tires or replacement tires is not an issue under consideration in examination, before an area appeals office, or before a federal court (within the meaning of section 3.09 of Rev. Proc. 2002–9, 2002–3 I.R.B. 327, as modified by Rev. Proc. 2002–19, 2002–13 I.R.B. 696, and as modified and clarified by Announcement 2002–17, 2002–8 I.R.B. 561), or is not an issue pending in examination (within the meaning of section 6.03(6) of Rev. Proc. 2002– 9), on April 3, 2002, the taxpayer must follow the automatic change in method of accounting provisions in Rev. Proc. 2002–9 (or its successor) with the following modifications:

(1) The scope limitations in section 4.02 of Rev. Proc. 2002–9 do not apply. If the taxpayer is under examination, before an area appeals office, or before a federal court regarding any income tax issue other than the treatment of its qualifying vehicle’s original tires or replacement tires, the taxpayer must provide a copy of the Form 3115, Application for Change in Accounting Method, to the examining officer, appeals officer, or government counsel (whichever is applicable) at the same time it files the copy of the Form 3115 with the national office. The Form 3115 must contain the name(s) and telephone number(s) of the examining officer, appeals officer, or government counsel, as appropriate.

(2) To assist the Service in processing changes in method of accounting under this section of the revenue procedure, and to ensure proper handling, section 6.02(4)(a) of Rev. Proc. 2002–9 is modified to require that a Form 3115 filed under this revenue procedure include the statement: “Automatic Change Filed Under Rev. Proc. 2002–27.” This statement should be legibly printed or typed on the appropriate line on any Form 3115 filed under this revenue procedure.

of the Commissioner before changing a method of accounting for federal income tax purposes. Section 1.446–1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions deemed necessary to permit a taxpayer to obtain consent to change a method of accounting.

.06 Since the issuance of the court decisions and revenue rulings previously discussed, the quality of tires has improved significantly. Most tires manufactured in recent years have useful lives in excess of a year, although some taxpayers, because of the nature of their business activities, still consume their tires within a year. To minimize disputes regarding the useful lives of original tires and replacement tires for certain vehicles, the Internal Revenue Service will permit a taxpayer that complies with the requirements of this revenue procedure to account for the cost of original tires and replacement tires for certain vehicles using the original tire capitalization method described in section 5 of this revenue procedure.