The IRS today released an advance version of Rev. Rul. 2015-11 that examines three factual situations involving the use of precious metals in manufacturing, and concludes that:
Read the text of Rev. Rul. 2015-11 [PDF 27 KB]
The three factual situations examined in Rev. Rul. 2015-11 are as follows:
Property is depreciable, under section 167, if it is subject to exhaustion, wear and tear, or obsolescence, and has a determinable estimated useful life.
The IRS had previously ruled on the depreciation treatment of precious metals used in situations similar to those in Rev. Rul. 2015-11.
In Rev. Rul. 75-491, the taxpayer placed a specific amount of molten tin in service in a glass production process. About 10% of the tin was lost each year, and was replaced. The IRS characterized the original amount of tin as a fungible commodity that did not lose its identity, did not suffer exhaustion, wear and tear, or obsolescence. It ruled that the tin was not depreciable. The IRS did allow a current deduction under section 162 for the amount of tin that was consumed each year (and replaced with other, fungible tin).
Rev. Rul. 90-65 addressed two situations. The first situation was the same as Situation 1 in today’s revenue ruling. The IRS said that the gold in the jewelry should be accounted for separately from the other physical portions of the jewelry because it represented more than 50% of the cost of the item and was recoverable. The IRS ruled that the gold was not depreciable because the utility of the gold did not diminish as a result of its fabrication into sample jewelry, and could not be considered to suffer exhaustion, wear and tear, or obsolescence. The other items and costs of producing the sample jewelry could be depreciated separately.
The second situation in Rev. Rul. 90-65 dealt with platinum used as a catalyst in prills, similar to Situation 2 in Rev. Rul. 2015-11. Approximately 15% to 20% of the platinum was lost during use as a catalyst. The spent catalyst is sent to a reclaimer, where approximately 80% to 85% of the platinum initially contained in the prills is recovered and refabricated into prills. The IRS noted that the platinum represented more than 50% of the cost of the item and was recoverable, so it needed to be accounted for separately from the rest of the prill. The IRS characterized the platinum similarly to the tin in Rev. Rul. 75-491, as nondepreciable, and said the cost of any replacement platinum could be currently deducted.
Several court decisions over the years applied different analyses of the tax treatment of precious metals than had the IRS. The Eighth Circuit in a 2003 decision (O’Shaughnessy v. Commissioner) allowed molten tin in a situation similar to Rev. Rul. 75-491, to be depreciated. The Fifth Circuit in a 1985 case (Arkla, Inc. v. United States) held that cushion gas used in a pipeline could be depreciated if it would be permanently kept in the pipeline, even though it would not deteriorate or be exhausted, but that any recoverable cushion gas was not depreciable.
In today’s revenue ruling, the IRS adopted a factual analysis approach, generally following the approach applied by the Eighth Circuit and the Fifth Circuit. Because the factual analysis approach permits depreciation of initial installations of certain precious metals, the IRS abandoned the standard provided by Rev. Rul. 90-65 concerning whether the cost of the precious metals is more than half the cost of the overall fabricated property. Accordingly, Rev. Rul. 90-65 is revoked.
The IRS also revoked Rev. Rul. 75-491, abandoning the rationale that the cost of precious metal that replenished the original amount was a current deduction.
Therefore, the IRS reached the following conclusions in Rev. Rul. 2015-11:
Today’s revenue ruling provides that any change in a taxpayer's treatment of the cost of precious metals to conform with Rev. Rul. 2015-11 is a change in method of accounting that must be made in accordance with sections 446 and 481 and the related regulations and applicable administrative procedures. This would generally be allowed as an automatic accounting method change. The amount of the section 481(a) adjustment must account for the proper amount of the depreciation allowable that is required to be capitalized under any provision of the Code (for example, section 263A) as of the beginning of the year of change.
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