The IRS has advised in a recent internal legal memorandum (ILM 2012-28-036) that a partnership's switch from using an airplane primarily in its trade or business to primarily leasing the airplane to a commercial carrier represented a change in use that requires an adjustment to the recovery period of the airplane starting with the year the use changed.
The partnership had originally bought the airplane for business travel between its automobile dealerships located throughout the country. The partnership began depreciating the airplane over five years. In subsequent years, the business use of the airplane became less necessary and less affordable. Since the partnership was unable to sell the airplane, it entered into a dry lease agreement with a certified carrier in the business of chartering aircraft to offset the cost of maintaining the airplane. During the first taxable year the airplane was leased, the flight time percentages were 83 percent charted by the lessee, 15 percent used in the business and 2 percent personal.
Rev. Proc. 87-56 sets forth class lives of property that are necessary to compute the depreciation allowances under Section 168. The revenue procedure establishes two broad categories of depreciable assets: 1) asset classes that consist of specific assets used in all businesses and 2) assets used in specific business activities. The same asset can be described in both categories, in which case it is included in the specific asset class.
Asset class 00.21 includes airplanes except those used in commercial or contract carrying of passengers or freight, and all helicopters. Airplanes described in this class have a MACRS recovery period of five years. The partnership appropriately classified the airplane in this category when it was first placed in service. Asset class 45.0 includes assets (except helicopters) used in commercial and contract carrying of passengers and freight by air. Airplanes described in this class have a MACRS recovery period of seven years.
The regulations under Section 168(i) provide rules for determining the depreciation deduction for a year during which the taxpayer changes the use of such property but continues to hold the property. If a change in use results in a longer MACRS recovery period than existed before the change in use, the depreciation allowance beginning with the year of the change in use is determined as if the taxpayer had originally placed the property in service with the longer recovery period.
In the year at issue, the airplane was used in two business activities — as part of the partnership's business of operating automobile dealerships and leased to a commercial carrier. The cost of the airplane cannot be allocated between these two activities. Instead, Section 167 requires that the asset be depreciated according to the activity for which it is primarily used. In this case, the airplane was used primarily as a commercial carrier, which requires a longer MACRS recovery period than was required when the airplane was originally placed in service.
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