Broader use of the income forecast method.

Perhaps the most important depreciation methods case decided over the past several years was ABC Rentals of San Antonio v. Commissioner. In this case, the court ruled the income forecast method could be used to depreciate tangible property. Prior to the case, the income forecast method was used primarily by motion picture companies--it allowed for a depreciation of property over a period that was determined by a film's income. However, it no longer is limited to the assets of a motion picture company.

The Tax Court, citing Internal Revenue Code section 168(f)(1), said the taxpayer could choose not to use the modified accelerated cost recovery system (MACRS) as long as the property was properly depreciated under a method not based on the property's life. Because ABC Rentals accurately documented its projected income as derived from its rental property, it could be depreciated under the income forecast method.

Observation: The use of the income forecast method is particularly significant to airlines, chemical, steel, paper and auto companies because the alternative minimum tax depreciation adjustment--a major factor in their tax profiles--does not apply when depreciation is computed under a method other than MACPS. In fact, the only drawback to using the income forecast method is that, unlike MACRS, property cannot be depreciated below its salvage value. Under revenue ruling 95-52, the INS opposed the expanded use of the income forecast method. It is likely the U.S. Supreme Court will have to resolve this issue. --Robert Willens, CPA, managing director at Lehman Brothers, New York City