BIR Ruling

March 11, 1974 Pilipinas Shell Petroleum Corporation P. O. Box 441, Manila Attention: Mr . V . K . Esteban Treasury Manager Gentlemen : This refers to your letters dated February 28, 1974 and March 6, 1974, requesting a ruling whether the facilities needed to store your Lead Alkyl Anti-Knock Compound consisting of the storage tanks, apparatus, pipelines and equipment could be depreciated within a period of five (5) years for income tax purposes. In your letter, you submitted the following representations: cdta "We are currently negotiating with the Associated Octel Company Limited of London, England, to supply our company with our requirement of Lead Alkyl Anti-Knock Compound in bulk, which heretofore we have purchased from them in drums. We would inform you that Lead Alkyl Anti-Knock Compound is a chemical product which is highly toxic in nature, which we use as additive in our business of manufacturing motor gasoline. To enable our company to receive the subject compound in bulk, it is necessary that we construct a bulk terminal within the premises of our Refinery at Tabangao, Batangas. The bulk terminal shall principally include several storage tanks which are especially built for the reception of the subject Compound. "Considering the highly toxic nature of this Compound, we feel that for depreciation purposes, a five (5) year life should be given to the tanks, including the necessary pipelines, apparatus and other equipment. It should be stated that the tanks which shall contain this Compound can only store or hold Lead Alkyl Anti-Knock Compound, and no other products. Therefore, if we decide or we are prevented in the future from using this Compound, the storage tanks will no longer be serviceable. Neither will the tanks have any value other than for the purpose of holding the same kind of Compound." You also represented that you intend to enter into a Supply Contract with your supplier for a five-year period covering the subject Compound. In reply, I have the honor to inform you that Section 105 of Revenue Regulations No. 2 provides that "a reasonable allowance for exhaustion, wear and tear, and obsolescence of property used in the trade or business may be deducted from gross income". Section 110 of the same Regulations provides that reasonable deduction for obsolescence may be allowed "with respect to physical property and whole or any portion of which is clearly shown by the taxpayer as being affected by economic conditions that will result in its being abandoned at a future date prior to the end of its useful life." It has been held that complete obsolescence occurs when the property is no longer economically useful for the purpose for which it was acquired and cannot be used for any other purposes (Des Moines Title Co. v. Commissioner of Internal Revenue, 39 BTA 729); and that a corporation whose business was the purchasing of refuse grains from brewers, curing them through special machinery and selling them for cattle feed, was entitled to obsolescence deduction where due to prohibition, its buildings and machinery were of special design, unsuited for use in any other business, and were rendered obsolete when the brewers were forced to close. (Farmers Feed Co. v. Commissioner of Internal Revenue, 17 BTA 507). In the instant case, it appears that the storage facilities in question which are used in your business are specially built for the subject Compound and the same cannot be used for any other purpose except for storage of the said Compound. Therefore, at the termination of the five-year Supply Contract between you and your supplier, the said storage facilities will no longer be usable. In other words, the uselessness of the storage facilities does not depend on your own decision but on the five-years supply contract with your supplier. In view thereof, your query is answered in the affirmative. cdta Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5