SHORT TAX YEARS are often overlooked in calculating depreciation.
For example, a new partnership formed to own a power plant will have a “short” tax year when the power plant goes into operation. If the power plant begins operating in November, the partners will qualify the first year at most for only 2/12ths of the tax depreciation that they would have had if they owned the power plant directly. A new company is not allowed to calculate depreciation as if it had been in business all year.
However, the IRS said in a “technical advice memorandum” released in November that new corporations that join with other companies in filing a consolidated federal income tax return do not have short tax years. An existing company formed two special-purpose subsidiaries to acquire two television stations. Each subsidiary was formed late in the year. An IRS agent insisted on audit that the group overstated its tax depreciation the first year by failing to take into account that the subsidiaries had short tax years. The IRS national office disagreed. It said it treats all members of a consolidated group as if they were a single corporation that was in existence for the full year.
A “technical advice memorandum” is a ruling by the IRS national office to settle a dispute between a taxpayer and an IRS agent on audit.