Deductibility, for Income Tax Purposes, of the Net Book Value of Certain Machine or Equipment Which is Discarded or the Use of Which Has Been Abandoned

February 21, 1994 BIR RULING NO. 076-94 29 (d) (2) 000-00 076-94 Atty. Artemio M. Lobrin Tax Consultant Suites 314-315 Yuchengco Bldg. 484 Quintin Paredes Street Manila S i r : This refers to your letter dated February 12, 1991 requesting for a ruling as to the deductibility, for income tax purposes, of the net book value of certain machine or equipment which is discarded or the use of which has been abandoned. It is represented that in the early 80s, your client, Philippine Refining Co., Inc., invested in a new plant, involving a continuous manufacturing process, to replace their batch process lines with the end in view of reducing product variability, labor costs and space; that the plant represented new technology and as such involved some developmental aspects which could only be confirmed in actual full scale production trials; that a number of unforeseen various deficiencies were experienced during full operation in 1985; that several approaches to overcome these major drawbacks were vigorously pursued but without sufficient success to warrant continuing with the line; that furthermore, the legislated use of cocoactives in NSD Bar manufacture commencing in 1989, pursuant to Executive Order 259, represented a new formulation technology which makes this line completely not needed for NSD Bar operation; that several attempts to convert this plant for other uses have been futile; that there are no known other industries which could make use of this plant; that finally the plant has been abandoned and discarded in 1990, and its net book value was written off in the books as loss. cdtech In reply, please be informed that pursuant to Section 98 of Revenue Regulations No. 2 reading: "Sec. 98. Loss of Useful Value . When through some change in business conditions, the usefulness in the business of some or all of the capital assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use of such business, he may claim as deduction the actual loss sustained. In determining the amount of the loss, adjustment must be made, however, for improvements, depreciation and the salvage value of the property. This exception to the rule requiring a sale or other disposition of property in order to establish a loss requires proof of some unforeseen cause by reason of which the property has been prematurely discarded, as, for example, where an increase in the cost or change in the manufacture of any product makes it necessary to abandon such manufacture, to which special machinery is exclusively devoted, or where new legislation directly or indirectly makes the continued profitable use of the property impossible. This exception does not extend to a case where the useful life of property terminates solely as a result of those gradual processes for which depreciation allowance are authorized. It does not apply to inventories or to other than capital assets. The exception applies to buildings only when they are permanently abandoned or permanently devoted to a radically different use, and to machinery only when its use as such is permanently abandoned. Any loss to be deductible under this exception must be charged off in the books and fully explained in returns of income." your opinion is confirmed that your client's machine or equipment which are discarded, or the use of which has been abandoned in 1990 if charged off in the books and fully explained in the income tax return shall be deductible from your client's gross income for 1990 to the extent of its net book value. cdta Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue