## Facts

- Diebold, Inc., an accrual-basis corporate taxpayer, manufactured modular automated teller machines (ATMs) and maintained a pool of replacement modules used in servicing customer ATMs.
- Under service contracts, Diebold replaced malfunctioning modules with modules from its pool, repaired the defective modules, and returned repaired modules to the pool; customers paid an annual service fee with no separate charge for modules.
- On its original 1976 and 1977 returns, Diebold treated the replacement modules as non-depreciable inventory and claimed no depreciation or investment tax credit for them.
- During an IRS audit, Diebold filed amended returns for 1976–1979 reclassifying the replacement modules as depreciable property and sought refunds for 1976 and 1977 based on depreciation deductions.
- Diebold informed the examining agent that the revised treatment was assertedly necessary to clearly reflect income.
- The IRS disallowed the refund claims on the ground that Diebold changed its method of accounting without obtaining the Commissioner’s prior consent as required by I.R.C. § 446(e).

## Issues

1. Whether reclassifying the replacement modules from non-depreciable inventory to depreciable property constituted a change in method of accounting under I.R.C. § 446(e).
2. Whether the change was ineffective because Diebold failed to obtain the Commissioner’s prior consent before computing income under the new method.
3. Whether Diebold could avoid § 446(e) by characterizing the change as correction of an error or as a change from a method not “regularly used,” or by claiming implied consent during the audit.

## Decision

- The court granted summary judgment for the United States and denied Diebold’s refund claims.
- The court held that Diebold’s reclassification changed the timing of deductions and therefore was a change in method of accounting subject to § 446(e).
- Because Diebold did not secure the Commissioner’s prior consent, the amended-return depreciation deductions could not support refunds.
- The court rejected Diebold’s arguments that the change was merely an error correction, that the prior inventory treatment was not “regularly used,” or that IRS audit conduct supplied implied consent.

## Legal Principles

- A change that affects the timing of income or deductions—such as reclassifying costs from inventory treatment (deferring deductions) to depreciation (spreading deductions over time)—is a change in method of accounting for purposes of I.R.C. § 446(e).
- Under § 446(e), a taxpayer must secure the Commissioner’s consent before computing taxable income under a new accounting method; filing amended returns does not substitute for prior consent.
- A method reflected consistently in the taxpayer’s filed returns for the years at issue is treated as the method “regularly” used for § 446(e) purposes.
- Consent to change an accounting method requires an affirmative grant through the applicable administrative process and is not implied from audit communications, consideration of the taxpayer’s position, or the IRS’s continuation of an examination.

## Conclusion

The court held that Diebold’s attempt to retroactively reclassify ATM replacement modules from inventory to depreciable assets altered the timing of deductions and therefore constituted a change in method of accounting requiring prior consent under I.R.C. § 446(e); lacking such consent, Diebold was not entitled to refunds based on the amended returns.


Diebold, Inc. v. United States, 16 Cl. Ct. 193 (1989)