                       T.C. Memo. 2001-150



                     UNITED STATES TAX COURT



BROOKSHIRE BROTHERS HOLDING, INC. AND SUBSIDIARIES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 4522-99.                        Filed June 22, 2001.



         In the early 1990’s, P constructed, placed into
    service, and began depreciating gas station properties.
    P, an accrual method taxpayer, calculated its
    depreciation deductions for tax purposes using the
    modified accelerated cost recovery system (MACRS) of
    sec. 168, I.R.C. On its returns for the years ended in
    1993, 1994, and 1995, P classified and depreciated the
    gas stations as nonresidential real property, with a
    31.5- or 39-year recovery period. Subsequently, P filed
    amended returns for those years reclassifying the gas
    stations as 15-year property, based upon an Industry
    Specialization Program Coordinated Issue Paper issued
    by the Internal Revenue Service. R then remitted
    refunds. P thereafter filed original returns for the
    years ended in 1996 and 1997 which depreciated the gas
    stations as 15-year property. R challenged this
    treatment as an unauthorized change in accounting
    method.

          Held: In filing returns for the years ended in
     1996 and 1997 which depreciated the gas stations as 15-
                                - 2 -

     year property, P did not violate the rules set forth in
     sec. 446(e), I.R.C., regarding changes in method of
     accounting.


     William H. Lester, Jr., Matthew S. Parkin, and Joshua A.

Sutin, for petitioner.

     David B. Mora and W. Lance Stodghill, for respondent.



                          MEMORANDUM OPINION

     NIMS, Judge:   Respondent determined Federal income tax

deficiencies for petitioner’s tax years ended April 1996 and

April 1997, in the amounts of $54,645 and $71,260, respectively.

After concessions, the sole issue for decision is whether

deductions taken by petitioner, for depreciation of gas station

properties, represent a change in accounting method made without

securing the “consent of the Secretary” as required under section

446(e).   (Section 1.446-1(e)(2)(i), Income Tax Regs., substitutes

“consent of the Commissioner” for consent of the Secretary, which

practical substitution we henceforth adopt.)   Additional

adjustments made in the statutory notice of deficiency are

computational in nature and will be resolved by our holding on

the foregoing issue.

     Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect for the years at

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.
                               - 3 -

                            Background

     This case was submitted fully stipulated in accordance with

Rule 122, and the facts are so found.    The stipulations of the

parties, with accompanying exhibits, are incorporated herein by

this reference.

Petitioner’s Operations

     Brookshire Brothers Holding, Inc., is, and was at the time

of filing the petition in this case, a Nevada corporation which

maintained its principal offices in Lake Charles, Louisiana.

Brookshire Brothers Holding, Inc., and its subsidiaries

(hereinafter collectively petitioner) are an affiliated group of

corporations which for all relevant tax years filed a

consolidated Federal income tax return.

     As a significant component of its activities, petitioner is

engaged in the business of operating a chain of grocery stores.

In September of 1991, petitioner began constructing gas station

properties accessible through the parking lots of certain of its

grocery stores.   These gas stations were subsequently placed into

service at grocery store locations throughout the State of Texas.

Petitioner’s Accounting

     Petitioner employs the accrual method of accounting and uses

a taxable year ending on the last Saturday of April.    Within this

overall method of accounting, petitioner generally computes
                                - 4 -

depreciation for tangible assets placed in service after 1986

under the modified accelerated cost recovery system (MACRS), in

accordance with section 168.

     On its U.S. Corporation Income Tax Return, Form 1120, for

the year ended April 24, 1993, petitioner began depreciating the

gas station properties.1   In doing so, petitioner characterized

the gas stations as nonresidential real property.   Petitioner

likewise classified the gas stations as nonresidential real

property on its returns for the taxable years ending in April of

1994 and April of 1995.    On the basis of such classification and

the prescribed treatment for nonresidential real property under

the MACRS rules, petitioner’s returns for the years ended in

1993, 1994, and 1995 reflected depreciation of the gas stations

using the straight line method and a recovery period of 31.5 or

39 years.    (The Omnibus Budget Reconciliation Act of 1993, Pub.

L. 103-66, sec. 13151, 107 Stat. 448, extended the recovery

period for nonresidential real property from 31.5 to 39 years,

generally effective for property placed into service after May

12, 1993.)




     1
        Although the parties stipulated that petitioner began
depreciating the gas stations in the year ending in 1992, this
appears to be erroneous because petitioner’s return for the
fiscal year ending April 25, 1992, does not reflect any such
deductions on the depreciation schedule. We therefore rely on
the Form 1120 for that fiscal year. See Jasionowski v.
Commissioner, 66 T.C. 312, 316-318 (1976).
                               - 5 -

     Then, on July 15, 1996, petitioner filed with the Internal

Revenue Service an Amended U.S. Corporation Income Tax Return,

Form 1120X, for each of the tax years ended in 1993 through 1995.

On these amended returns, petitioner reclassified the gas

stations as 15-year property under the MACRS rules and,

consistent therewith, recalculated depreciation utilizing the 150

percent declining balance method and a 15-year recovery period.

Petitioner also included the following explanation with each Form

1120X:   “THE DETERMINATION WAS MADE THAT GAS STATION CONVENIENCE

STORES SHOULD BE RECLASSED FROM 31.5 AND 39 YEAR PROPERTY TO 15

YEAR PROPERTY BASED ON THE ATTACHED MEMO.”   The memo so

referenced and attached was a copy of an Industry Specialization

Program Coordinated Issue Paper for Petroleum and Retail

Industries (ISP paper).

     The ISP paper, issued by the Internal Revenue Service with a

stated effective date of March 1, 1995, set forth the test under

which a convenience store would qualify as 15-year property,

rather than nonresidential real property, for MACRS depreciation

purposes.   In general, the ISP paper required that the store be

used primarily to market petroleum products.   At some time

thereafter, the Internal Revenue Service issued to petitioner

refunds of the full amount 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.
                                 - 6 -

     After filing the amended returns for prior years, petitioner

filed original Forms 1120 for the years ended in April of 1996

and April of 1997.   On these returns, the gas stations were

classified and depreciated as 15-year property.    Petitioner at no

time filed a Form 3115, Application for Change in Method of

Accounting, with respect to the gas station properties.

     Respondent subsequently examined petitioner’s returns for

the tax years ended in 1996 and 1997 and issued a notice of

deficiency with respect to those years on December 8, 1998.

Therein, respondent determined, among other things, that

petitioner’s deductions for depreciation must be decreased

because petitioner, in treating the gas stations as 15-year

property, had engaged in a change of accounting method without

the consent of the Commissioner.     Respondent computed the amount

of such decreases in depreciation expense as being $302,101 and

$257,833 for the years ended in 1996 and 1997, respectively.    The

corresponding increases in taxable income resulted in

deficiencies that are the subject of this litigation.

                               Discussion

I.   General Rules

     A.   Accounting Methods

     As a threshold premise, section 446(a) sets forth the

general rule that “Taxable income shall be computed under the

method of accounting on the basis of which the taxpayer regularly
                               - 7 -

computes his income in keeping his books.”    Section 446(e) then

provides the particular standard governing changes in accounting

method and reads as follows:

          SEC. 446(e). 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 consent of the Secretary.

In addition, regulations promulgated under section 446 further

clarify the operation of these statutory mandates:

          Requirement respecting the adoption or change of
     accounting method. (1) A taxpayer filing his first
     return may adopt any permissible method of accounting
     in computing taxable income for the taxable year
     covered by such return. * * *

     (2)(i) Except as otherwise expressly provided in
     chapter 1 of the Code and the regulations thereunder, a
     taxpayer who changes the method of accounting employed
     in keeping his books shall, before computing his income
     upon such new method for purposes of taxation, secure
     the consent of the Commissioner. Consent must be
     secured whether or not such method is proper or is
     permitted under the Internal Revenue Code or the
     regulations thereunder. [Sec. 1.446-1(e)(1) and
     (2)(i), Income Tax Regs.]

     For purposes of the foregoing rules, a change in accounting

method “includes a change in the overall plan of accounting for

gross income or deductions or a change in the treatment of any

material item used in such overall plan.”    Sec. 1.446-

1(e)(2)(ii)(a), Income Tax Regs.   A material item, in turn, “is

any item which involves the proper time for the inclusion of the

item in income or the taking of a deduction.”    Id.
                              - 8 -

     However, notwithstanding the breadth of these definitions,

the regulations also offer the following caveat:    “Although a

method of accounting may exist under this definition without the

necessity of a pattern of consistent treatment of an item, in

most instances a method of accounting is not established for an

item without such consistent treatment.”   Id.   Moreover, the

regulatory text details certain types of adjustments, with

examples thereof, that are specifically excluded from

characterization as changes in accounting method:

     A change in method of accounting does not include
     correction of mathematical or posting errors, or errors
     in the computation of tax liability (such as errors in
     computation of the foreign tax credit, net operating
     loss, percentage depletion or investment credit).
     Also, a change in method of accounting does not include
     adjustment of any item of income or deduction which
     does not involve the proper time for the inclusion of
     the item of income or the taking of a deduction. For
     example, corrections of items that are deducted as
     interest or salary, but which are in fact payments of
     dividends, and of items that are deducted as business
     expenses, but which are in fact personal expenses, are
     not changes in method of accounting. In addition, a
     change in the method of accounting does not include an
     adjustment with respect to the addition to a reserve
     for bad debts or an adjustment in the useful life of a
     depreciable asset. Although such adjustments may
     involve the question of the proper time for the taking
     of a deduction, such items are traditionally corrected
     by adjustments in the current and future years. * * * A
     change in the method of accounting also does not
     include a change in treatment resulting from a change
     in underlying facts. On the other hand, for example, a
     correction to require depreciation in lieu of a
     deduction for the cost of a class of depreciable assets
     which had been consistently treated as an expense in
     the year of purchase involves the question of the
                                  - 9 -

     proper timing of an item, and is to be treated as a change
     in method of accounting. [Sec. 1.446-1(e)(2)(ii)(b), Income
     Tax Regs.]

     Once a change in method of accounting is identified, the

procedures for securing the Commissioner’s consent are contained

in section 1.446-1(e)(3), Income Tax Regs.     To secure such

consent, the taxpayer must “file an application on Form 3115 with

the Commissioner” or, alternatively, must comply with any

administrative procedures the Commissioner might prescribe for

permitting certain types of changes in accounting method.        Id.

     B.   Depreciation Deductions

     Depreciation deductions are primarily governed by sections

167 and 168.     In relevant part, section 167 provides:

     SEC. 167.    DEPRECIATION.

          (a) General Rule.--There shall be allowed as a
     depreciation deduction a reasonable allowance for the
     exhaustion, wear and tear (including a reasonable
     allowance for obsolescence)--

                (1) of property used in the trade or
           business, or

                (2) of property held for the production of
           income.

           (b) Cross Reference.--

          For determination of depreciation deduction in
     case of property to which section 168 applies, see
     section 168.

     Section 168, in turn, describes a specific depreciation

system for tangible property.     Section 168 was added to the

Internal Revenue Code by the Economic Recovery Tax Act of 1981,
                                - 10 -

Pub. L. 97-34, 95 Stat. 172, which enacted the accelerated cost

recovery system (ACRS).    Then, as part of the Tax Reform Act of

1986, Pub. L. 99-514, secs. 201, 203, 100 Stat. 2122-2123, 2143,

Congress replaced ACRS with a modified accelerated cost recovery

system (MACRS), effective generally for property placed in

service after December 31, 1986, and section 168 was amended

accordingly.

      Under MACRS, assets are placed into 1 of 10 classes.    See

sec. 168(c), (e).   Classifications are assigned either according

to class life or, for certain types of property, by the nature of

the asset.   See id.    The classification of an item under MACRS

determines two critical elements in calculating the allowable

depreciation:   (1) The applicable depreciation method (200

percent declining balance, later switching to straight line; 150

percent declining balance, later switching to straight line; or

straight line), and (2) the applicable recovery period (the

period over which depreciation deductions are taken).     See sec.

168(a), (b), and (c).     As pertinent here, two of the available

MACRS classifications are 15-year property and nonresidential

real property, which differ both in the required depreciation

method and in the mandated recovery period.     See id.

II.   Contentions of the Parties

      The parties in this matter do not dispute, and have

stipulated, that petitioner’s gas stations are assets of a nature
                               - 11 -

which may properly be classified as 15-year property under the

MACRS rules.   Rather, their disagreement lies in whether

petitioner’s treatment of the properties as such on tax returns

filed for the years at issue constitutes an unauthorized change

in method of accounting.

     Petitioner’s primary contention is that depreciating the gas

stations as 15-year property does not reflect a change in

accounting method within the meaning of section 446(e).

According to petitioner, reclassification of the gas stations as

15-year property is excepted from characterization as a change in

accounting method because the new treatment does not involve a

material item, is analogous to a change in useful life, is a mere

correction, and does not deviate from an established consistent

method of treatment.

     In the alternative, even if depreciating the gas stations as

15-year property is deemed a change in accounting method,

petitioner maintains that consent for such change was received

from respondent.    Petitioner alleges that respondent’s acceptance

of petitioner’s amended returns for prior years and issuance of

refunds constitutes a sufficient consent for the

reclassification.

     Conversely, respondent asserts that petitioner changed its

method of accounting for the gas station properties, without

respondent’s consent, in two respects.   In respondent’s
                              - 12 -

estimation, petitioner’s reclassification involved changing (1)

the recovery period over which depreciation deductions were to be

claimed from 31.5 or 39 years to 15 years and (2) the method by

which depreciation was to be calculated from straight line to

declining balance.   Respondent further avers that these

alterations are not immaterial in that they implicate the timing

of deductions, are not equivalent to a change in useful life, are

not akin to the mere correction of a posting error, and do

diverge from a consistently established method.

     It is also respondent’s position that the above change was

made without securing respondent’s consent.   Respondent relies on

the fact that petitioner neither filed a Form 3115 nor followed

any other prescribed administrative procedures for effecting such

a change.

III. Application

     The initial question raised by this matter is whether

petitioner’s treatment of the gas stations as 15-year property

constitutes a change in accounting method within the meaning of

section 446(e) and related regulations.   If such inquiry is

answered in the affirmative, a second question regarding whether

petitioner obtained consent for the change will be presented.

     As previously indicated, a change in accounting method for

purposes of section 446(e) is generally defined to encompass a

change in the overall plan of accounting for income or deductions
                               - 13 -

as well as a change in the treatment of any material item.     See

sec. 1.446-1(e)(2)(ii)(a), Income Tax Regs.      A material item, in

turn, is explained by regulations as “any item which involves the

proper time for the inclusion of the item in income or the taking

of a deduction.”   Id.   This Court has also expounded that “When

an accounting practice merely postpones the reporting of income,

rather than permanently avoiding the reporting of income over the

taxpayer’s lifetime, it involves the proper time for reporting

income.”   Wayne Bolt & Nut Co. v. Commissioner, 93 T.C. 500, 510

(1989).

     In the case at bar, petitioner altered neither its overall

plan of accounting for income and deductions on an accrual basis

nor its basic system of accounting for depreciation using MACRS.

Petitioner is, however, seeking to switch from deducting the cost

of its gas station properties over a 31.5- or 39-year period on a

straight line basis to writing off these costs over a 15-year

term on a declining balance basis.      Such involves the timing of

deductions, not the total amount of lifetime income, and would

thus appear at first blush to be a “material” difference

signaling a change in accounting method.

     Yet regulations specifically provide that “a change in the

method of accounting does not include * * * an adjustment in the

useful life of a depreciable asset”, notwithstanding the fact

that “such adjustments may involve the question of the proper
                                - 14 -

time for the taking of a deduction”.     Sec. 1.446-1(e)(2)(ii)(b),

Income Tax Regs.   Therefore, regardless of whether a change might

otherwise be deemed an unauthorized material alteration, the

change will not run afoul of section 446(e) if it falls within

this useful life exception.

     Petitioner asks us to find that its revision of the recovery

period used in depreciating its gas stations is the equivalent of

an adjustment in useful life.    Respondent, in contrast, argues

that the concept of useful life as employed under prior law

cannot be equated with the designation of a recovery period under

the current accelerated system.

     Prior to the 1981 enactment of ACRS, depreciation deductions

were based on estimated useful life, meaning the period over

which an asset could reasonably be expected to be useful to the

taxpayer in his or her business or income-producing activities.

See Liddle v. Commissioner, 103 T.C. 285, 290 (1994), affd. 65

F.3d 329 (3d Cir. 1995).   Then, with implementation of the

accelerated system, Congress mandated that depreciation

deductions be taken over one of a limited number of arbitrary

statutory periods.   See id. at 291.     Yet to the extent that

selection of a useful life under prior law or a recovery period

under current law determines the span of years over which
                              - 15 -

property will be depreciated, there would appear to be no

meaningful difference for purposes of the exception in section

1.446-1(e)(2)(ii)(b), Income Tax Regs.

     However, the foregoing analogy is complicated by the fact

that, as presently codified in section 168, MACRS inextricably

links recovery period and depreciation method.   A

reclassification thus can affect not only the time over which

deductions are taken but also the methodology by which those

deductions are calculated.   Such linkage generally did not exist

under earlier statutes2, and previous case law indicates that a

change in depreciation method was not excluded from the consent

requirement.   See Standard Oil Co. (Indiana) v. Commissioner, 77

T.C. 349, 410-411 (1981); Casey v. Commissioner, 38 T.C. 357,

384-387 (1962).

     Hence, we are faced with a choice.   On one hand, to adopt

petitioner’s approach and rule that a reclassification of

property under MACRS should be treated as synonymous with an

adjustment in useful life for purposes of the regulatory

exception would broaden the exception to cover changes not only

in the period for depreciation but also potentially in the method



     2
        There were some exceptions, see, e.g., former sec. 167(c)
(accelerated depreciation is available only for property with a
useful life of 3 years of more); former sec. 167(j)(5) (sec. 1250
property that is used residential real property qualifies for a
125 percent declining balance method if the property has a useful
life of 20 years or more).
                                - 16 -

for calculating depreciation.    On the other hand, to accept

respondent’s position and summarily decline to equate the changes

would significantly curtail the exception’s usefulness under the

current section 168 regime.

     We conclude that the former option is most consistent with

the regulatory scheme.    The similarities between a change in

MACRS classification and a change in useful life are greater than

the differences.   Section 1.446-1(e)(2)(ii)(b), Income Tax Regs.,

was clearly intended to permit taxpayers to alter their

depreciation schedules.    The type of adjustment explicitly

permitted--a change in useful life--would have resulted both in

depreciation deductions over a longer or shorter period than

originally contemplated and in an increased or decreased amount

being deducted in any given period.      A change in MACRS

classification will have precisely these same two effects.

Although a portion of the change in amount may be attributable to

calculation method, as opposed to period length alone, such

carries insufficient weight when balanced against severely

limiting the intended relief.

     We therefore hold that the filing of returns for the years

ended in 1996 and 1997 which depreciated the gas stations as 15-

year property did not result in an unauthorized change in

petitioner’s method of accounting.       Petitioner’s change in MACRS

classification is excluded from the definition of a change in
                               - 17 -

accounting method by reason of analogy to the useful life

exception contained in section 1.446-1(e)(2)(ii)(b), Income Tax

Regs.    Accordingly, we need not reach the parties’ other

contentions regarding the existence of a mere correction, a

consistently adopted method, or consent from the Commissioner.

     As a final note, we observe that neither party has cited

section 168(e)(3)(E)(iii), enacted as part of the Small Business

Job Protection Act of 1996, Pub. L. 104-188, sec. 1120(a), 110

Stat. 1765.    Nor have they asked us to address the application of

Rev. Proc. 97-10, 1997-1 C.B. 628, promulgated under such

statute, to situations similar to that presently before the

Court.    We thus express no opinion as to the reach of the useful

life exception in the section 168(e)(3)(E)(iii) context or in

other circumstances where Congress or the Commissioner has

explicitly set forth procedures relating to particular

depreciation adjustments.

     To reflect the foregoing and to give effect to concessions,



                                          Decision will be entered

                                     under Rule 155.
