Capital expenditures - Uncle Fed's Tax*Board
Capital expenditures - Uncle Fed's Tax*Board
Capital expenditures - Uncle Fed's Tax*Board
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<strong>Capital</strong> <strong>expenditures</strong><br />
66.1 Advertising costs; fair. Amounts paid by<br />
an accrual basis taxpayer to a controlled corporation<br />
for advertising and promoting the taxpayer’s<br />
products at a fair must be capitalized and amortized<br />
over the periods during which the fair is in<br />
operation. §1.162–1. (Sec. 162, ’86 Code.)<br />
Rev. Rul. 68-283, 1968–1 C.B. 63.<br />
66.2 Airlines route; development and certification<br />
costs. Expenditures made by an airline in<br />
acquiring “temporary” certificates of public convenience<br />
and necessity from the Civil Aeronautics<br />
Board are capital <strong>expenditures</strong> depreciable over<br />
the term of the award. Costs incurred in defending
<strong>Capital</strong> <strong>expenditures</strong><br />
temporary authority are depreciable over the<br />
remaining life of such authority. Costs incurred<br />
beginning with the taxable year of the Board’s<br />
decision to determine permanent authorization, as<br />
well as any unrecovered costs of “temporary” certificates<br />
converted to “permanent” certificates,<br />
are not depreciable. In cases of “mixed awards,”<br />
costs reasonably allocated to authority denied are<br />
deductible losses; costs allocated to certificates<br />
awarded on a temporary basis are depreciable over<br />
the term of the award; and costs allocated to permanent<br />
certificates are not depreciable. Rev. Rul.<br />
56-600 amplified. §§1.165-1, 1.167(a)-3,<br />
1.263(a)-1. (Secs. 165, 167, 263; ’86 Code.)<br />
Rev. Rul. 67-113, 1967-1 C.B. 55.<br />
66.3 Airlines route; development costs.<br />
Expenditures incurred in connection with the<br />
acquisition and development of air routes are capital<br />
<strong>expenditures</strong>. No part of such <strong>expenditures</strong><br />
may be charged off due to suspension of operations,<br />
but must be deferred until the abandonment<br />
of the route. Amplified by Rev. Rul. 67–113. (Sec.<br />
263, ’86 Code.)<br />
Rev. Rul. 56-600, 1956-2 C.B. 171.<br />
66.4 Annuity payments exchanged for dower<br />
interest in farm. Annuity payments payable out<br />
of income from farm property distributed by a probate<br />
court to a decedent’s son in exchange for the<br />
release of a widow’s dower rights and interest in<br />
the property are nondeductible capital <strong>expenditures</strong>.<br />
§§1.162-1, 1.263(a)-1. (Secs. 162, 263; ’86<br />
Code.)<br />
Rev. Rul. 72-81, 1972-1 C.B. 98.<br />
66.5 Appraisal fees on mortgage loans; life<br />
insurance company. Appraisal fees incurred by a<br />
life insurance company in connection with the<br />
acquisition of mortgage loans are capital <strong>expenditures</strong><br />
to be amortized over the life of the debt. The<br />
fees are not current expenses related to investment<br />
income to be deducted in the year incurred.<br />
§1.804-4. (Sec. 804, ’86 Code.)<br />
Rev. Rul. 67-369, 1967-2 C.B. 235.<br />
66.6 Attorney fees. Attorneys obtained a judgment<br />
against the decedent for services they performed<br />
regarding a stock transaction, the proceeds<br />
from which were ordered paid into the court and<br />
subsequently disbursed to the attorneys and estate.<br />
Held, a portion of the judgment amount was a capital<br />
expenditure. (Sec. 113(b)(1), ’39 Code; Sec.<br />
1016, ’86 Code.)<br />
A. P. Steckel, 26 T.C. 600, Nonacq., 1957-1<br />
C.B. 6.<br />
66.7 Bankrupt corporations; trustee’s <strong>expenditures</strong>.<br />
Costs and expenses incurred by a corporation’s<br />
trustee in bankruptcy in connection with<br />
the institution and administration of reorganization<br />
proceedings under Chapter X of the Bankruptcy<br />
Act are capital <strong>expenditures</strong> of the corporation;<br />
however, such <strong>expenditures</strong> in a liquidation<br />
under Chapters I through VII of the Act, except for<br />
expenses connected with sales of assets that must<br />
be offset against proceeds, are deductible by the<br />
corporation under section 162. In either the reorganization<br />
or liquidation bankruptcy, the expenses<br />
of the trustee in operating the bankrupt’s business<br />
are deductible under section 162. I.T. 2004 superseded.<br />
§31.162–1, 1.263(a)–1. (Secs. 162, 263;<br />
’86 Code.)<br />
Rev. Rul. 77-204, 1977-1 C.B. 40.<br />
66.8 Baseball player contracts; acquisition<br />
costs; change of accounting method. Conditions<br />
are set forth under which a major league baseball<br />
club will be permitted to change its method of<br />
accounting for acquisition costs of uniform baseball<br />
players’ contracts to one consistent with Rev.<br />
Rul. 67–379 for taxable years beginning after<br />
October 31, 1967. The adjusted basis of the contract<br />
as well as its useful life is subject to verification<br />
and acceptance upon audit. §§1.446–1,<br />
1.481-1, 1.1031(a)-1. (Secs. 446, 481, 1031; ’86<br />
Code.)<br />
Rev. Rul. 70-318, 1970-1 C.B. 113.<br />
66.9 Bonuses and commissions for securing<br />
customers. Bonuses and commissions paid to<br />
salesmen and dealers and plumbing contractors by<br />
a gas distributor for securing five-year leases for<br />
hot water heaters are capital <strong>expenditures</strong> amortizable<br />
over the term of the lease. Rev. Rev. 68–651<br />
distinguished. §§1.162-1, 1.263(a)-2. (Secs. 162,<br />
263; ’86 Code.)<br />
Rev. Rul. 69-331, 1969-1 C.B. 87.<br />
66.10 Bottom hole contribution. A “bottom<br />
hole” contribution is includable in the recipient’s<br />
gross income and must be treated as a capital<br />
expenditure by the payor. §§1.61–1, 1.263(a)-1,<br />
1.612-4. (Secs. 61, 263, 612; ’86 Code.)<br />
Rev. Rul. 80-153, 1980-1 C.B. 10.<br />
66.11 Brokerage fees; long-term lease. The<br />
entire amount of commission paid to a broker for<br />
obtaining a long-term property lease is a capital<br />
expenditure that must be amortized over the life of<br />
the lease beginning with the first day of such lease<br />
regardless of the method of accounting used by the<br />
taxpayer. I.T. 2263 superseded. §§1.162-1,<br />
1.167-1, 1.263(a)-1. (Secs. 162, 167, 263; ’86<br />
Code.)<br />
Rev. Rul. 70-408, 1970-2 C.B. 68.<br />
66.12 Brokerage fees; stock reacquisition.<br />
Brokerage fees paid by a domestic corporation in<br />
acquiring its own stock for the purpose of bolding<br />
it as treasury stock or retirement, are part of the<br />
purchase price and are not business expenses<br />
deductible under section 162, O.D. 852 superseded.<br />
§§1.162–1, 1.263(a)–2. (Secs. 162, 263;<br />
’86 Code.)<br />
Rev. Rev. 69-561, 1969-2 C.B. 25.<br />
66.13 Camp site. Preliminary expenses<br />
incurred in search of a site for a boys’ camp and<br />
expenses attributable to the promotion of the business<br />
to be established are not deductible as either<br />
business expenses or nonbusiness expenses. The<br />
expenses incurred in the acquisition of a lease on<br />
the selected site are capital in nature and are amortizable<br />
over the life of the lease. Rev. Rul. 55-442<br />
superseded. §§1.162-1, 1.178-1, 1.212-1,<br />
1.263(a)-1. (Secs. 162, 178, 212, 263; ’86 Code.)<br />
Rev. Rul. 73-421, 1973-2 C.B. 33.<br />
66.14 Carrying charges; intercompany loan<br />
interest; election. The listing of interest under the<br />
heading “deferred intercompany interest” on a<br />
schedule of a subsidiary that was attached to the<br />
consolidated return of an affiliated group of corporations<br />
is a proper election to capitalize interest on<br />
an intercompany loan. Rev. Rul. 70-539 distinguished.<br />
§§1.266-1, 1.1502-13. (Secs. 266, 1502;<br />
’86 Code.)<br />
Rev. Rul. 76-325, 1976-2 C.B. 88.<br />
66.15 Carrying charges, etc.; election<br />
improper. A manufacturing corporation that for<br />
ten years capitalized taxes and carrying charges<br />
incurred on machinery used in its business without<br />
having properly elected to do so adopted a method<br />
of accounting with respect to such expenses and is<br />
precluded from amending its returns for open<br />
years and deducting the expenses for such years.<br />
Rev. Rul. 70–539 distinguished. Clarified by Rev.<br />
Rul. 77-236. §§1.266-1, 1.446-1. (Secs. 266,<br />
446; ’86 Code.)<br />
Rev. Rul. 75-56, 1975-1 C.B. 98.<br />
66.16 Carrying charges, etc.; election<br />
improper. A change in accounting method relating<br />
to the capitalization of carrying charges and<br />
taxes under section 266 requires computation of<br />
the necessary adjustment pursuant to section 481.<br />
Rev. Rul. 75-56 clarified. §1.266-1. (Sec. 266.<br />
’86 Code.)<br />
Rev. Rul. 77-236, 1977-2 C.B. 84.<br />
66.17 Carrying charges, etc.; election to<br />
capitalize. A corporation, engaged in developing<br />
real estate, that failed to file a statement with its<br />
original returns identifying the carrying charges,<br />
interest and taxes it had elected to capitalize, did<br />
not make a valid and binding election under section<br />
266 and is not precluded from deducting such<br />
expenses as current operating expenses in<br />
amended returns. Distinguished by Rev. Ruls.<br />
75-56 and 76-325. §1.266-1. (Sec. 266, ’86<br />
Code.)<br />
Rev. Rul. 70-539, 1970-2 C.B. 70.<br />
66.18 Car-top sign; rural mail carrier. The<br />
cost incurred by a rural mail carrier for a U.S. mail<br />
identification car-top sign is a capital expenditure<br />
recoverable through depreciation. Since the sign is<br />
attached to the vehicle used in delivering mail, the<br />
depreciation deduction is allowable as a transportation<br />
expense in arriving at adjusted gross<br />
income. §§1.62–1, 1.162–1, 1.263(a)–1. (Secs.<br />
62, 162, 263; ’86 Code.)<br />
Rev. Rev. 67-444, 1967-2 C.B. 80.<br />
66.19 Cattle breeding service agreement. A<br />
cash method taxpayer entered into a cattle breeding<br />
service agreement (termed a lease) under<br />
which the taxpayer leases a cow from a herd<br />
owner. The agreement provides that a calf will be<br />
produced within 1 year of mating, will remain with<br />
its mother for 1 year, and will be healthy and sound<br />
for breeding at the time of weaning. The agreement<br />
terminates when the calf is weaned, at which<br />
time the taxpayer may take possession of the calf,<br />
sell it, or place it in a herd management program.<br />
The cost attributable to the service agreement,<br />
including a breeding fee and the initial costs of caring<br />
for a cow and calf until the calf is weaned, are<br />
capital <strong>expenditures</strong> under section 263.<br />
§§1.162-12, 1.263(a)-1. (Secs. 162, 263; ’86<br />
Code.)<br />
Rev. Rul. 79-176, 1979-1 C.B. 123.<br />
66.20 Christmas trees; planting and cultivation.<br />
The cost of silviculture practices, such as<br />
weeding, cleaning, and noncommercial thinning,<br />
are deductible business expenses in connection<br />
with the cultivation of Christmas trees as a trade or<br />
business. However, <strong>expenditures</strong> for planting,<br />
basal pruning, stump culture, pruning, related land<br />
improvements, and equipment or other depreciable<br />
assets must recapitalized. Modified to provide<br />
that <strong>expenditures</strong> for shearing and basal pruning<br />
are deductible business expenses for taxable years<br />
ending after May 24, 1971. §§1.162-1,<br />
1.263(a)–1, 1.611-3, 301.7805–1. (Secs. 162,<br />
263, 611, 7805; ’86 Code.)<br />
Rev. Rul. 66–18, 1966-1 C.B. 59; Rev. Rul.<br />
71-228, 1971–1 C.B. 53; Daniel D. Kirrley, 51<br />
T.C. 1000, Acq., 1971-2 C.B. 3.<br />
66.21 Citrus and almond trees; maintenance<br />
before permanent planting. Expenses incurred<br />
in maintaining citrus and almond trees at any time<br />
before the close of the four-year period beginning<br />
with the year in which the trees are planted in their<br />
permanent moves must be capitalized. Rev. Rul.<br />
80-25 clarified. §1.278-1. (Sec. 278, ’86 Code.)<br />
Rev. Rul. 83-128, 1983-2 C.B. 57.<br />
66.22 Citrus grove; irrigation system. The<br />
taxpayer placed in service an irrigation system<br />
used in the development of a citrus grove.<br />
Depreciation on the irrigation system prior to the<br />
time the grove reaches the income producing stage<br />
must be capitalized and recovered over the useful<br />
life of the grove, beginning in the year the grove<br />
reaches an income producing stage. Rev. Rul.<br />
80-25 modified. §§1.167(a)-1, 1.263(a)-2,<br />
1.278-1, 301.7805.1. (Secs. 167, 263, 278, 7805;<br />
’86 Code.)<br />
Rev. Rul. 83-67, 1983-1 C.B. 74.<br />
66.23 Citrus groves; trees and irrigation system.<br />
A taxpayer, who was developing a citrus<br />
grove, planted citrus trees and installed and placed<br />
in service an irrigation system. The taxpayer may
<strong>Capital</strong> <strong>expenditures</strong><br />
take a depreciation deduction for the cost of the<br />
trees beginning in the year the trees first reach an<br />
income producing stage and for the cost of the<br />
irrigation system beginning in the year the system<br />
is placed in service. Modified by Rev. Rul. 83–67;<br />
Clarified by Rev. Rul. 83-128. §§1.167(a)-1,<br />
1.263(a)-2, 1.278-1. (Secs. 167, 263, 278; ’86<br />
Code.)<br />
Rev. Rul. 80-25, 1980-1 C.B. 65.<br />
66.24 Citrus trees; income producing state.<br />
Revenue Ruling 65–104, relating to the qualification<br />
of citrus trees as section 38 property for purposes<br />
of the investment credit, is clarified to<br />
remove the implication that all <strong>expenditures</strong> necessary<br />
to bring orchard trees to an income producing<br />
state must be capitalized. §§1.162–12,<br />
1.175-1, 1.180-1, 1.182-1. (Secs. 162, 175, 180,<br />
182; ’86 Code.)<br />
Rev. Rul. 66-183, 1966-2 C.B. 47.<br />
66.25 Clearing of right-of-way; quarry property.<br />
Costs incurred by a quarry operator to reimburse<br />
a power company for the relocation of<br />
power transmission facilities located on a right-ofway<br />
through the quarry property are additional<br />
capital <strong>expenditures</strong> made to acquire full rights to<br />
the mineral deposits, recoverable through depletion,<br />
and are not “development <strong>expenditures</strong>”<br />
subject to section 616 of the Code. §1.616–1. (Sec.<br />
616, ’86 Code.)<br />
Rev. Rul. 66-170, 1966-1 C.B. 159.<br />
66.26 Coal mining; airshaft, compressor and<br />
fan to maintain normal output. Due to a recession<br />
of the working faces of their mine, a coal mining<br />
company made <strong>expenditures</strong> for an air shaft,<br />
fan, and compressor which the Commissioner<br />
contended were capital improvements with a useful<br />
life of 20 years. Held, the <strong>expenditures</strong> were<br />
incurred to maintain normal output of the mine<br />
and are allowable business expenses. The Commissioner’s<br />
contention that the <strong>expenditures</strong> must<br />
be shown to be minor rather than major was without<br />
authority. (Sec. 23(m), ’39 Code; Sec. 611, ’86<br />
Code.)<br />
Roundup Coal Mining Co., 20 T.C. 388, Nonacq.,<br />
1954–1 C.B. 8.<br />
66.27 Coal mining equipment to maintain<br />
normal output of coal. The sole shareholder of a<br />
mining corporation deducted, as a supply expense,<br />
the cost of movable conveyor equipment with an<br />
approximate life expectancy of five years that was<br />
used to maintain the production level of coal but<br />
neither materially increased the mine’s value nor<br />
deceased the cost of production. Held, the <strong>expenditures</strong><br />
were not required to be capitalized but<br />
were deductible as ordinary and necessary business<br />
expenses. (Sec. 162, ’86 Code.)<br />
Leland Adkins. 51 T.C. 957, Acq., 1970-1 C.B.<br />
xv.<br />
66.28 Computer software; development<br />
costs. Guidelines are provided for use in connection<br />
with the examination of income tax returns<br />
involving deductions of costs incurred in the<br />
developing, purchasing or leasing of computer<br />
software, effective with respect to taxable years<br />
ending after October 27, 1969; however, the Service<br />
will not disturb taxpayers’ treatment of software<br />
costs for prior taxable years except to the<br />
extent such treatment is markedly inconsistent<br />
with the practices set forth. §§1.162-4, 1.162–11.<br />
(Sec. 162, ’86 Code.)<br />
Rev. Proc. 69-21, 1969–2 C.B. 303.<br />
66.29 Computer software; development<br />
costs; accounting method. The capitalization of<br />
software costs with respect to a new computer<br />
constitutes a change in method of accounting<br />
requiring the Commissioner’s consent, where, in<br />
prior years, with respect to another computer, a<br />
taxpayer has always expensed the software costs<br />
for both book and Federal income tax purposes.<br />
§§1.162-4, 1.446-1. (Secs. 162, 446; ’86 Code.)<br />
Rev. Rul. 71-248, 1971-1 C.B. 55.<br />
66.30 Construction of speculative housing.<br />
The costs (including land) incurred in the<br />
construction of a house for speculative sale should<br />
be capitalized regardless of the taxpayer’s overall<br />
method of accounting, but not taxes and carrying<br />
charges for which an election to capitalize has not<br />
been made under section 266. Such costs shall be<br />
applied against the amount realized upon sale of<br />
the house, for purposes of determining gain or<br />
loss. Administrative and selling expenses may be<br />
deducted in the year incurred or paid if such<br />
method clearly reflects income. §§1.266–1,<br />
1.446-1, 1.461-1. (Secs. 266, 446, 461; ’86<br />
Code.)<br />
Rev. Rul. 66-247, 1966-2 C.B. 198.<br />
66.31 Contribution to state construction of<br />
bridge. A voluntary contribution by a corporation<br />
to defray in part the cost to the state of construction<br />
of a bridge which can be used by the corporation<br />
to transfer stone from its quarry on one side of a<br />
river to its plant on the other side is an exhaustible<br />
capital expenditure depreciable or amortizable<br />
over the estimated useful life of the bridge (period<br />
of economic usefulness to the corporation). (Sec.<br />
263, ’86 Code.)<br />
Rev. Rul. 58-373, 1958-2 C.B. 125.<br />
66.32 Contributions to exempt service organization.<br />
Payments by a group of taxpayers to a<br />
nonprofit exempt organization organized by them<br />
for the purpose of rendering necessary marine<br />
radio telephone service, to the extent used by the<br />
corporation to purchase equipment, constitute a<br />
capital investment subject to depreciation. That<br />
portion of the payments utilized by the corporation<br />
to meet current operating expenses constitutes<br />
payment for services rendered by it to the taxpayers<br />
and is deductible by them as a business<br />
expense. §§1.162–1, 1.263(a)–1. (Secs. 162, 263;<br />
’86 Code.)<br />
Rev. Rul. 58–534, 1958-2 C.B. 125.<br />
66.33 Contributions to hospital association.<br />
Payments by a corporation to a hospital association,<br />
under an agreement which furnished the taxpayer<br />
with particular rights and interests for its<br />
employees for a period often years in certain properties<br />
and facilities of a hospital to be constructed,<br />
are not deductible as charitable contributions or as<br />
business expenses, but constitute capital <strong>expenditures</strong>.<br />
§§39.23(a)–1, 39.23(a)–1, 39.24(a)–2.<br />
(Secs. 23(a), 23(q), 24(a), ’39 Code; Secs. 162,<br />
170, 263, ’86 Code.)<br />
Rev. Rul. 55-616, 1955-2 C.B. 545.<br />
66.34 Corporate salaries in connection with<br />
corporate mergers and acquisitions. The portion<br />
of the compensation paid by a corporation to<br />
its employees attributable to services performed in<br />
connection with corporate mergers and acquisitions<br />
must be capitalized; however, such amounts<br />
paid with respect to abandoned plans for mergers<br />
or acquisitions are deductible as losses in the year<br />
of abandonment. §§1.165–1, 1.263(a)–1. (Secs.<br />
165, 263; ’86 Code.)<br />
Rev. Rul. 73–580, 1973-2 C.B. 86.<br />
66.35 Costs of completed homes and homes<br />
under construction. Construction costs of completed<br />
homes and costs of construction in progress<br />
are capital <strong>expenditures</strong> under section 263, and<br />
may not be inventoried under the LIFO inventory<br />
method. Rev. Rul. 69-536 amplified.<br />
§§1.263(a)-1, 1.446-1, 1.472-1. (Secs. 263, 446,<br />
472; 86 Code.)<br />
Rev. Rul. 86-149, 1986-2 C.B. 67.<br />
66.36 Cost of employee benefits; selfconstructed<br />
property. Costs of certain employee<br />
benefits for employees engaged in self-constructing<br />
the employer’s property are nondeductible<br />
capital <strong>expenditures</strong> under section 263. I.T. 3408<br />
obsoleted. §§1.162–10, 1.263(a)-1, 1.263A-1T,<br />
1.404(a)-1, 1.419-1T. (Secs. 162, 263, 263A,<br />
404, 419; ’86 Code.)<br />
Rev. Rul. 92-31, 1992-1 C.B. 101.<br />
66.37 Cultural practices; farmers. A farmer<br />
who elected to capitalize certain cultural practices<br />
<strong>expenditures</strong> and who, because of an erroneous<br />
computation, deducted a portion of such <strong>expenditures</strong><br />
cannot be required to capitalize the amount<br />
claimed as expenses. (Sec. 162, ’86 Code.)<br />
Richard R. Wilbur, 43 T.C. 322, Acq., 1965-2<br />
C.B. 7.<br />
66.38 Custody and creation fees; sponsored<br />
investment plan. “Custody” fees paid by subscribers<br />
in a sponsored investment plan to the custodian<br />
of the plan for holding the shares of stock<br />
acquired, collecting and reinvesting cash dividends,<br />
etc., are deductible nonbusiness expenses.<br />
However, “creation” fees paid to the sponsor in<br />
developing, selling, and administering the plan in<br />
connection with acquisition of the stock area capital<br />
expenditure which must be added to the cost of<br />
the shares acquired. §§29.23(a)–15, 29.24-2.<br />
(Secs. 23(a), 24, ’39 Code; Secs. 162, 263, ’86<br />
Code.)<br />
Rev. Rul. 3, 1953-1 C.B. 37.<br />
66.39 Depositors’ guaranty fund; equalization<br />
payments. An equalization payment by a<br />
savings and loan association to a depositor’s guaranty<br />
fund as a condition of membership, and representing<br />
in substance an equity in the fund, is a nonamortizable<br />
capital expenditure. Withdrawals<br />
from the fund will be recognized as gain or loss<br />
measured by the difference between the amount of<br />
money received on withdrawal and the adjusted<br />
basis of the equity interest in the fund. §1.162-13.<br />
(Sec. 162, ’86 Code.)<br />
Rev. Rul. 72-379, 1972-2 C.B. 92.<br />
66.40 Development company maintenance<br />
assessments. Maintenance charges assessed<br />
against owners of residential property to provide<br />
municipal services and improvements are includable<br />
in the gross income of the development company<br />
and are not deductible as taxes by the property<br />
owners. No portion of the amount assessed is<br />
a capital expenditure. If an owner converts the<br />
property to rental property, such charges would be<br />
deductible business expenses. §§39.22(a)-1,<br />
39.23(a)-1. (Secs. 22(a), 23(a), ’39 Code; Secs<br />
61, 162, ’86 Code.)<br />
Rev. Rul. 55-154, 1955-1 C.B. 216.<br />
66.41 Dikes, seawalls, etc., to counteract land<br />
subsidence. Amounts expended for construction<br />
of seawalls, dikes, pumping facilities, etc., to<br />
counteract land subsidence arc capital <strong>expenditures</strong><br />
and may be recovered through an allowance<br />
for depreciation over the useful life of the facilities,<br />
depending upon construction and the rate of<br />
subsidence to which they are subjected. However,<br />
repairs, maintenance, and moving costs occasioned<br />
by subsidence, are currently deductible<br />
business expenses. §§1.162-1, 1.167(a)-1,<br />
1.263(a)-1. (Sec. 162, 167, 263; ’86 Code.)<br />
Rev. Rul. 60-386, 1960-2 C.B. 107.<br />
66.42 Dredging and excavation costs. Costs of<br />
excavating water canals and dredging channels in<br />
harbors and slips are investments in tangible property<br />
and are depreciable if the asset is actually<br />
exhausting and the exhaustion is susceptible to<br />
measurement. Rev. Ruls. 66-71, 68–280, 68-483,<br />
69-78 modified, and 69–606 clarified.<br />
§1.167(a)-2. (Sec. 167, ’86 Code.)<br />
Rev. Rul. 75–137, 1975–1 C.B. 74.<br />
66.43 Dredging costs; harbor. Dredging costs<br />
incurred to deepen a portion of a harbor alongside<br />
a pier leading to a navigable channel which are for<br />
improvements to land rights are <strong>expenditures</strong> for
an intangible asset of a capital nature and are not<br />
depreciable when the useful life of such asset is not<br />
susceptible of measurement. Modified by Rev.<br />
Rul. 75-137. §1.167(a)-3. (Sec. 167, ’86 Code.)<br />
Rev. Rul. 66-71, 1966-1 C.B. 44.<br />
66.44 Earthen terraces. Taxpayer attempted to<br />
prevent soil erosion on the farms he had cultivated<br />
for many years by grading the land into earthen<br />
terraces. Held, the expenses of terracing were for<br />
maintenance and conservation, not for permanent<br />
improvements, and were deductible business<br />
expenses. (Secs. 23(a), 24(a), ’39 Code; Secs. 162,<br />
263, ’86 Code.)<br />
J. H. Collingwood, 20 T.C. 937, Acq., 1954-1<br />
C.B. 4.<br />
66.45 Environmental impact studies. A public<br />
utility company conducted, and paid another organization<br />
to conduct, environmental impact studies<br />
to support its application to state regulatory agencies<br />
to expand its generating facilities. The<br />
expenses are not research and experimental<br />
<strong>expenditures</strong>. However, if not chargeable to a capital<br />
account, the expenses are deductible business<br />
expenses. §1.162–1, 1.174–2. (Secs. 162, 174;<br />
’86 Code.)<br />
Rev. Rul. 80-245, 1980-2 C.B. 72.<br />
66.46 Equipment used for capital improvements.<br />
Depreciation sustained on construction<br />
equipment owned by a taxpayer and used in the<br />
erection of capital improvements for its own use<br />
is not an allowable deduction, but shall be added<br />
to and made a part of the cost of the capital<br />
improvements. So much thereof as is applicable to<br />
the cost of depreciable capital improvements is<br />
recoverable through deductions for depreciation<br />
over the useful life of such capital improvements.<br />
Clarified by Rev. Rul. 77-325. §§1.167(a)-1,<br />
1.263(a)-2. (Secs. 167, 263; ’86 Code.)<br />
Rev. Rul. 59–380, 1959-2 C.B. 87.<br />
66.47 Equipment used for capital improvements.<br />
Depreciation on equipment a public utility<br />
owns and uses in the construction of its own capital<br />
facilities must be capitalized under section<br />
263(a). §§1.167(a)–1, 1.263(a)-2. (Secs. 167,<br />
263; ’86 Code.)<br />
Idaho Power Co., 418 U.S. 1, Ct. D. 1965,<br />
1974-2 C.B. 85.<br />
66.48 Equipment used for capital improvements;<br />
accelerated depreciation. The depreciation<br />
capitalized and added to the cost of capital<br />
improvements in accordance with the holding in<br />
Rev. Rul. 59–380 is computed on the basis of the<br />
depreciation period and method used for tax purposes<br />
regardless of the period and method used for<br />
book purposes. Rev. Rul. 59-380 clarified.<br />
§§1.167(a)-1, 1.167(a)–11, 1.167(a)-12,<br />
1.263(a)-1. (Secs. 167, 263; ’86 Code.)<br />
Rev. Rul. 77-325, 1977-2 C.B. 67.<br />
66.49 Evaluation <strong>expenditures</strong>; acquisition of<br />
residential property for renovation and resale.<br />
Evaluation <strong>expenditures</strong> incurred by a domestic<br />
corporation in connection with the acquisition of<br />
existing residential property for renovation and<br />
resale are capital <strong>expenditures</strong> that must be taken<br />
into account as part of the cost of acquiring the<br />
property. However, if such <strong>expenditures</strong> do not<br />
result in the acquisition of property they are<br />
deductible as losses in the taxable year the corporation<br />
decides not to acquire the property.<br />
§§1.165-1, 1.263(a)-1. (Secs. 165, 263; ’86<br />
Code.)<br />
Rev. Rul. 74-104, 1974–1 C.B. 70.<br />
66.50 Excavation costs; water canal; utility<br />
company. Excavation costs of a water canal used<br />
as a conduit for circulating the water to cool an<br />
electric utility’s steam-plant condenser are capital<br />
<strong>expenditures</strong> for intangible assets that do not have<br />
a determinable useful life and hence are not subject<br />
to a depreciation allowance. Modified by Rev.<br />
Rul. 75-137. §1.167(a)-3. (Sec. 167, ’86 Code.)<br />
Rev. Rul. 69-78, 1969-1 C.B. 61.<br />
66.51 Expense of issuing bonds maturing<br />
serially. A proper proportion of the total expense<br />
of floating bonds that mature serially must be allocated<br />
to each series and each series then treated as<br />
a separate unit. The amortization deduction attributable<br />
to each series must be prorated equally over<br />
the life of the bonds constituting the series, however,<br />
if the bonds are retired before maturity, the<br />
deduction for that year should be increased by the<br />
amount which would ordinarily be deducted during<br />
the succeeding years for those particular<br />
bonds. I.T. 1412 superseded. §1.461-1. (Sec. 461,<br />
’86 Code.)<br />
Rev. Rul. 70-359, 1970-2 C.B. 103.<br />
66.52 Expense of securing loan evidenced by<br />
mortgage bond. Expenses incidental to securing<br />
a loan evidenced by a mortgage bond are not<br />
deductible in the year in which the loan is made but<br />
must be prorated over the life of the bond. S.M.<br />
3691 superseded. §§1.162-1, 1.461-1. (Secs. 162,<br />
461, ’86 Code.)<br />
Rev. Rul. 70-360, 1970-2 C.B. 103.<br />
66.53 Fee for lifetime use of hospital facilities;<br />
physician. A fee paid by physician to a hospital in<br />
exchange for a nontransferable lifetime privilege<br />
to use the hospital’s facilities is a capital expenditure<br />
recoverable by amortization deductions based<br />
on the physician’s life expectancy at the date of<br />
acquisition. Where it can be established that circumstances<br />
merit a shorter life, such shorter life<br />
should be utilized in computing the amortization<br />
deduction. §§1.162-1, 1.167(a)-3, 1.263(a)-1.<br />
(Secs. 162, 167, 263; ’86 Code.)<br />
Rev. Rul. 70-171, 1970-1 C.B. 55.<br />
66.54 Fee for maintenance of capital stock<br />
records. Fees paid, during the taxable year, to a<br />
registrar and transfer agent for the maintenance of<br />
capital stock records are deductible as business<br />
expenses except where the fees are incurred in<br />
connection with an original issue of stock, merger,<br />
consolidation, or stock dividend. I.T. 2582 superseded.<br />
§§1.162–1, 1.263(a)–1. (Secs. 162, 263;<br />
’86 Code.)<br />
Rev. Rul. 69-615, 1969-2 C.B. 26.<br />
66.55 Fee paid for preparation of an F.C.C.<br />
license application. An amount paid for the preparation<br />
of an F.C.C. application for a license to<br />
operate a radio system is a capital expenditure and<br />
not deductible as an expense under section 212, If<br />
the application is denied, the fee paid may be<br />
deductible at some future date as a loss under section<br />
165. §§1.165-1, 1.212-1, 1.263(a)-1,<br />
1.461-1. (Secs. 165, 212, 263, 461; ’86 Code.)<br />
Rev. Rul. 86-71, 1986-1 C.B. 102.<br />
66.56 Filling and grading real property. Taxpayer<br />
leased a building and property for his business,<br />
Construction on adjoining property blocked<br />
the leased property’s natural drainage causing<br />
water to puddle and seep into the building. Held,<br />
expenses of filling and grading the property were<br />
deductible repair expenses, not capital <strong>expenditures</strong>.<br />
(Sec. 23(a), ’39 Code; Sec. 162, ’86 Code.)<br />
Southern Ford Tractor Corp., 29 T.C. 833, Acq.,<br />
1958-2 C.B. 7.<br />
66.57 Football player contracts. The cost of<br />
football player contracts owned or controlled by<br />
professional football teams, including amounts<br />
paid or incurred upon the purchase of a contract<br />
and bonuses paid to players, must be capitalized<br />
and depreciated over the useful life of the contract;<br />
accelerated methods of depreciation and investment<br />
credit are not allowable with respect to such<br />
contracts. A change from the current deduction of<br />
contract acquisition costs to the capitalization and<br />
depreciation of such costs is a change in method of<br />
accounting. Such contracts are assets described in<br />
<strong>Capital</strong> <strong>expenditures</strong><br />
section 1231(b) and recognized gains upon the<br />
sale or exchange are subject to the recapture provisions<br />
of section 1245. Trades of contracts are<br />
exchanges of like kind property. §§1.38–1,<br />
1.48-1, 1.167(a)-3, 1.263(a)-2, 1.446-1,<br />
1.481–1, 1.1031(a)–1, 1.1231–1, 1.1245–1. (Secs.<br />
38, 48,167, 263, 446, 481, 1031, 1231, 1245; ’86<br />
Code.)<br />
Rev. Rul. 71–137, 1971–1 C.B. 104.<br />
66.58 Franchises; acquired by payment of<br />
another’s debts. Amounts paid to creditors of an<br />
insolvent corporation by a new corporation, to<br />
obtain franchises to sell the creditors’ products,<br />
constitute capital <strong>expenditures</strong>. Such payments<br />
are considered to be made to establish good will.<br />
§39.24(a)-2. (Sec. 24(a), ’39 Code; Sec. 263, ’86<br />
Code.)<br />
Rev. Rul. 55-332, 1955–1 C.B. 320.<br />
66.59 Geological and geophysical exploration<br />
<strong>expenditures</strong>; mineral property. The tax treatment<br />
of geological and geophysical exploration<br />
<strong>expenditures</strong>, for the purpose of obtaining data<br />
that will serve as a basis for the acquisition or<br />
retention of a mineral property by a taxpayer<br />
engaged in exploring for minerals is discussed.<br />
I.T. 4006 superseded. Amplified by Rev. Rul.<br />
83-105. §§1.165-1, 1.263(a)-1, 1.614-1,<br />
1.615-1, 1.617-1. (Secs. 165, 263, 614, 615, 617;<br />
’86 Code.)<br />
Rev. Rul. 77-188, 1977–1 C.B. 76.<br />
66.60 Geological and geophysical exploration<br />
<strong>expenditures</strong>; mineral property. The tax treatment<br />
of geological and geophysical <strong>expenditures</strong><br />
under Rev. Rul. 77–188 is explained in 7 factual<br />
situations. In addition to illustrating, by example,<br />
how the various geological and geophysical costs<br />
are to be allocated, what constitutes an abandonment<br />
as a potential source of mineral production<br />
is explained. Rev. Rul. 77-188 amplified.<br />
§§1.165-1, 1.263(a)-1. (Secs. 165, 263; ’86<br />
Code.)<br />
Rev. Rul. 83-105, 1983–2 C.B. 51.<br />
66.61 Geological exploration <strong>expenditures</strong>;<br />
COST well. An explanation is presented of the tax<br />
treatment of the expenses of drilling a Continental<br />
Offshore Stratigraphic Test (COST) well to obtain<br />
geological information on an offshore area to be<br />
used in determining whether to bid on leases for oil<br />
and gas drilling in the general area of the COST<br />
well. §§1.263(a)–1, 1.263(c)–1, 1.612–4. (Secs.<br />
263, 612; ’86 Code.)<br />
Rev. Rul. 80-342, 1980-2 C.B. 99.<br />
66.62 Golf greens. Expenditures incurred in the<br />
original construction of greens on a golf course<br />
constitute capital <strong>expenditures</strong> to be added to the<br />
original cost of the land and are not subject to<br />
depreciation. Subsequent operating expenses for<br />
sod, seed, soil and other maintenance constitute<br />
deductible business expenses. §39.24(a)–2. (Sec.<br />
24(a), ’39 Code; Sec. 263, ’86 Code.)<br />
Rev. Rul. 55-290, 1955-1 C.B. 320.<br />
66.63 Improvements on state highway; shopping<br />
center. Costs incurred for improvements<br />
made on a state-owned highway right-of-way to<br />
provide ingress and egress to a shopping center<br />
developed on leased land are capital <strong>expenditures</strong><br />
amortizable over the term of the lease.<br />
§§1.162-11, 1.167(a)-1, 1.263(a)-1. (Secs. 162,<br />
167, 263; ’86 Code.)<br />
Rev. Rul. 68-607, 1968-2 C.B. 115.<br />
66.64 Improvements to docks; sheet piling.<br />
The cost of sheet-piles on the dock side of a slip to<br />
eliminate annual maintenance <strong>expenditures</strong> is a<br />
capital investment recoverable through annual<br />
depreciation over the useful life of the slip. (Sec.<br />
265, ’86 Code.)<br />
Rev. Rul. 57-30, 1957-2 C.B. 109.<br />
66.65 Industrial project; leasing arrangement.<br />
A corporation that enters into certain agree-
<strong>Capital</strong> <strong>expenditures</strong><br />
ments with a political subdivision of a State for the<br />
financing, construction, and operation of an industrial<br />
project is considered to be the owner of the<br />
project. The primary agreement is in the form of<br />
a lease of the project by the city to the corporation<br />
with an option to purchase. The political subdivision<br />
obtained funds to finance the purchase or<br />
construction of the project by issuing industrial<br />
development bonds. The corporation will take into<br />
account any premium or discount on the bonds.<br />
Other tax treatment resulting to the corporation is<br />
set forth. Amplified to provide that bond counsel<br />
fees, printing costs, and other related fees incurred<br />
by a corporation in the issuance of the bonds must<br />
be amortized over the life of the bonds. §§1.38-1,<br />
1.61-1, 1.61-12, 1.162-1, 1.163-1, 1.164-1,<br />
1.167(a)-1, 1.263(a)-1. (Secs. 38, 61, 162, 163,<br />
164, 167, 263; ’86 Code.)<br />
Rev. Rul. 68–590, 1968-2 C.B. 66; Rev. Rul.<br />
73-134, 1973-1 C.B. 60.<br />
66.66 Initiation fees; securties exchange. Initiation<br />
fees, paid only once and in addition to the<br />
annuel dues, received by a securities exchange<br />
from each new member for the use of the<br />
exchange’s services and facilities constitute gross<br />
income and not contributions to capital. The initiation<br />
fees are to be capitalized by the payers as part<br />
of the cost basis of their memberships. G.C.M.<br />
4015 revoked and Rev. Rul. 72–123 distinguished.<br />
§§1.61-1, 1.118-1, 1.162-1, 1.263(a)-1. (Secs.<br />
61, 118, 162, 263; ’86 Code.)<br />
Rev. Rul. 77-354, 1977–2 C.B. 50.<br />
66.67 Insurance; malpractice; reserve premiums;<br />
retrospective rate credit refund clause.<br />
Reserve premiums paid under a medical malpractice<br />
liability insurance policy that are subject to a<br />
retrospective rate credit refund clause are deductible<br />
in the year paid as business expenses.<br />
§§1.162–1, 1.263(a)-1, 1.461-1. (Secs. 162, 263,<br />
461; ’86 Code.)<br />
Rev. Rul. 83-66, 1983-1 C.B. 43.<br />
66.68 Insurance and storage costs; aging<br />
whiskey. Insurance and storage costs incurred<br />
during the aging process of whiskey purchased as<br />
an investment are capital <strong>expenditures</strong> to be<br />
treated as part of the acquisition costs of the whiskey.<br />
§§1.212–1, 1.263(a)-1, 1.1012-1. (Secs. 212,<br />
263, 1012; ’86 Code.)<br />
Rev. Rul. 70-356, 1970-2 C.B. 62.<br />
66.69 Insurance premiums; construction<br />
loan. Insurance premiums paid in connection with<br />
a construction loan for business improvements<br />
may, at the election of the taxpayer, be capitalized.<br />
Such an election is binding until the improvements<br />
covered by the loan are completed. §39.24(a)–6.<br />
(Sec. 24(a), ’39 Code; Sec. 266, ’86 Code.)<br />
Rev. Rul. 56-264, 1956-1 C.B. 153.<br />
66.70 Insurance premiums; protection during<br />
construction of new building. Insurance premiums<br />
for public liability and workman’s compensation<br />
insurance paid in connection with the<br />
construction of a taxpayer’s new building when<br />
the taxpayer takes on the responsibility of a general<br />
contractor are capital <strong>expenditures</strong>. These<br />
premiums are not deductible as a business<br />
expense. §§1.162–1, 1.263(a)–1. (Secs. 162, 263;<br />
’86 Code.)<br />
Rev. Rul. 66-373, 1966-2 C.B. 103.<br />
66.71 Intangible development costs; affiliated<br />
group; consolidated returns. Treatment of<br />
intangible development costs incurred by members<br />
of an affiliated group that files consolidated<br />
returns where only certain members have elected<br />
to deduct such expenses currently or there are<br />
intergroup transfers of operating properties and<br />
new acquisitions. I.T. 3763 superseded.<br />
§§1.612-4, 1.1502-17. (Secs. 612, 1502; ’86<br />
Code.)<br />
Rev. Rul. 69-590, 1969-2 C.B. 170.<br />
66.72 Intangible drilling and development<br />
costs (IDC); associated with property located<br />
outside the United States. IDC associated with<br />
productive wells located on foreign property, to<br />
the extent represented by physical property, must<br />
be recovered through depreciation by the taxpayer<br />
that has elected to capitalize the IDC under section<br />
263(i)(2)(A), Rev. Rul. 67–34 is obsoleted with<br />
respect to IDC after December 31, 1986.<br />
§§1.263(c)-1, 1.612-4. (Secs. 263, 612; ’86<br />
Code.)<br />
Rev. Rul. 87-134, 1987-2 C.B. 69.<br />
66.73 Intangible drilling and development<br />
costs; carbon dioxide well. Carbon dioxide<br />
(CO2) produced from a well is subject to percentage<br />
depletion at the rate of 14 percent as a mineral<br />
described in the term “all other minerals” in section<br />
613(b)(7), The costs of drilling CO2 source<br />
wells to supply CO2 to be injected in certain oil<br />
fields are not subject to the option to expense<br />
intangible drilling and development costs.<br />
§§1.263(c)-1, 1.611-1, 1.612-4, 1.613-2,<br />
1.613A-1. (Secs. 263, 611, 612, 613, 613A; ’86<br />
Code.)<br />
Rev. Rul. 82-17, 1982-1 C.B. 95.<br />
66.74 Intangible drilling and development<br />
costs; drilling to acquire arrangement. Only<br />
half of the intangible drilling and development<br />
costs of drilling the first well, paid by a taxpayer<br />
for an assignment of an undivided one-half of the<br />
oil and gas operating interest in the tract of land,<br />
is subject to the option to charge such costs to<br />
expense or to capital. §§1.263(c)–1, 1.612-4.<br />
(Secs. 263, 611, 612; ’86 Code.)<br />
Rev. Rul. 70-657, 1970-2 C.B. 70.<br />
66.75 Intangible drilling and development<br />
costs; election. Section 263, as amended by the<br />
Energy Tax Act of 1978 to grant an option to<br />
deduct intangible drilling and development costs<br />
incurred with respect to geothermal wells, does<br />
not permit a new election for the treatment of such<br />
costs for oil and gas wells. §§1.263(c)–1, 1.612-4.<br />
(Secs. 263, 612; ’86 Code.)<br />
Rev. Rul. 80-2, 1980-1 C.B. 61.<br />
66.76 Intangible drilling and development<br />
costs; exploratory holes. Costs incurred to drill<br />
expendable holes to determine the location and<br />
delineation of offshore hydrocarbon deposits and<br />
capable of conducting hydrocarbons to the surface<br />
on completion are within the option to expense<br />
intangible drilling and development costs (IDC)<br />
provided by section 263(c), regardless of whether<br />
there is an intent to produce hydrocarbons.<br />
§§1.263(a)-1, 1.612-4. (Secs. 263, 612; ’86<br />
Code.)<br />
Rev. Rul. 88-10, 1988-1 C.B. 112.<br />
66.77 Intangible drilling and development<br />
costs; geothermal steam wells. For taxable years<br />
1960 through 1962, geothermal steam wells were<br />
gas wells for purposes of the percentage depletion<br />
allowance and the deduction for intangible drilling<br />
a costs. (Secs. 263, 611, 613; ’86 Code.)<br />
Arthur E. Reich, 52 T.C. 700, Nonacq. 1979-1<br />
C.B. 2.<br />
66.78 Intangible drilling and development<br />
costs; offshore platforms. Costs, including<br />
<strong>expenditures</strong> for engineering and design specifications,<br />
incurred to acquire offshore platforms<br />
through contracts with builders in connection with<br />
oil and gas properties are to be capitalized and<br />
recovered through depreciation. However, costs to<br />
transport the platform in its component form, performed<br />
under separate contract, including specifications<br />
relating thereto, and costs to set the platform<br />
in position at the site may be capitalized or<br />
expensed. §§1.263(c)–1, 1.612–4. (Secs. 263,<br />
612; ’86 Code.)<br />
Rev. Rul. 70-596, 1970-2 C.B. 68.<br />
66.79 Intangible drilling and development<br />
costs; offshore platforms. Guidance is provided<br />
regarding which costs incurred in the course of<br />
fabricating, transporting and installing an offshore<br />
oil and gas drilling and production platform and<br />
the related facilities and equipment are within the<br />
option to expense intangible drilling and development<br />
costs provided by section 263(c) of the Code.<br />
§§1.263(c)-1, 1.612-4. (Secs. 263, 612; ’86<br />
Code.)<br />
Rev. Rul. 89-56, 1989-1 C.B. 83.<br />
66.80 Intangible drilling and development<br />
costs; operating interest. The proper treatment is<br />
shown for an arrangement under which, in consideration<br />
for drilling an oil and gas well at a designated<br />
location on a leased tract of land, the driller<br />
receives from the lessee of the land an assignment<br />
of the entire working interest in the drill site and<br />
an undivided fraction of the working interest in the<br />
remainder of the tract. §§1.61–2, 1.263(c)-1,<br />
1.451-1, 1.612-4, 1.614-1, 1.1001-1,<br />
301.7805-1. (Secs. 61, 263, 451, 612, 614, 1001,<br />
7805; ’86 Code.)<br />
Rev. Rul. 77-176, 1977-1 C.B. 77.<br />
66.81 Intangible drilling and development<br />
costs; operating interest; capital or expense.<br />
The intangible drilling and development costs that<br />
arc subject to an option to charge to capital or<br />
expense are limited to those that are attributable to<br />
a fractional share of the operating interest that the<br />
carrying party received as his “permanent” interest<br />
upon the exercise of an option by the carried<br />
party to convert a retained overriding royalty into<br />
50 percent of operating interest when cumulated<br />
gross production from an oil and gas well equalled<br />
a specified amount. The remainder of such costs,<br />
including the depreciable equipment furnished, is<br />
attributable to the fraction of the operating interest<br />
held by the carried party upon his exercise of the<br />
option, and must be capitalized by the carrying<br />
party as the depletable capital cost of the interest<br />
acquired. §1.612–4. (Sec. 612, ’86 Code.)<br />
Rev. Rul. 70-336, 1970-1 C.B. 145.<br />
66.82 Intangible drilling and development<br />
costs; operating interest; capital or expense. A<br />
taxpayer agreed to drill and operate oil wells on<br />
each of two noncontiguous tracts in exchange for<br />
the entire operating interest in each tract until the<br />
aggregate gross income from both tracts equaled<br />
the cost of developing and operating both tracts<br />
and a 75% operating interest in each tract thereafter.<br />
The taxpayer’s deduction for intangible drilling<br />
and development costs is limited to the portion<br />
of those costs attributable to the 75%<br />
operating interest in each tract. Rev. Rul. 70–336<br />
modified. §§1.263(c)-1, 1.612-4, 1.614-1,<br />
301.7805-1. (Secs. 263, 612, 614, 7805; ’86<br />
Code.)<br />
Rev. Rul. 80-109, 1980-1 C.B. 129.<br />
66.83 Intangible drilling and development<br />
costs; operating interest; capital or expense. A<br />
carrying party who drills, completes, equips, and<br />
operates the first well in return for the entire operating<br />
interest in an oil and gas lease, until he<br />
recoups one-half of such costs, and thereafter<br />
owns an undivided one-fourth operating interest<br />
may only deduct one-fourth of the intangible drilling<br />
and development costs provided he makes a<br />
proper election. The remaining three-fourths of<br />
such costs must be capitalized and included in his<br />
basis in the lease, recoverable through depletion.<br />
§§1.263(c)-1, 1.611-1, 1.612-4. (Secs. 263, 611,<br />
612; ’86 Code.)<br />
Rev. Rul. 71-206, 1971-1 C.B. 105.<br />
66.84 Intangible drilling and development<br />
costs; operating interest; capital or expense. A<br />
carrying party who drills, completes, equips, and<br />
operates an oil and gas well in return for the entire<br />
operating interest in the lease during the period of<br />
complete recoupment (payout) of such costs, and<br />
thereafter owns an undivided one-half operating
interest may deduct all the intangible drilling and<br />
development costs provided he makes a proper<br />
election. At the end of the complete payout period<br />
he must capitalize 50 percent of the remaining<br />
undepreciated basis of lease and well equipment,<br />
if any, as the depletable leasehold acquisition costs<br />
of the operating interest acquired. §1.612–4. (Sec.<br />
612, ’86 Code.)<br />
Rev. Rul. 71-207, 1971-1 C.B. 160.<br />
66.85 Intangible drilling and development<br />
costs; operating interest; capital or expense. A<br />
carrying party who drills and completes an oil and<br />
gas well in return for the entire working interest in<br />
the lease until 200 percent of the drilling and<br />
development plus the equipment and operating<br />
costs necessary to produce that amount are<br />
recouped, and after such recoupment relinquishes<br />
all rights in the interest to the lessee, is the owner<br />
of all the working interest during the complete<br />
pay-out period and may exercise the option to<br />
deduct all intangible drilling and development<br />
costs. §§1.263(c)-1, 1.612–4. (Secs. 263, 612; ’86<br />
Code.)<br />
Rev. Rul. 75-446, 1975-2 C.B. 95.<br />
66.86 Intangible drilling and development<br />
costs; operating interest; investment allocation.<br />
A taxpayer’s investment in an oil and gas<br />
venture under a contract designating a dollar<br />
amount as intangible drilling and development<br />
costs is deductible pursuant to an election under<br />
section 263(c) only to the extent that such costs<br />
would have been incurred in an arms-length transaction<br />
with an unrelated drilling contractor. The<br />
remainder of the total investment is the basis of the<br />
taxpayer’s working interest. §§1.263(c)–1,<br />
1.612-4. (Secs. 263, 612; ’86 Code.)<br />
Rev. Rul. 73–211, 1973–1 C.B. 303.<br />
66.87 Intangible drilling and development<br />
costs; properties outside U.S. A domestic corporation<br />
that, under its agreement with a foreign<br />
country, furnishes all the funds for exploration,<br />
development, and production of gas and oil within<br />
designated areas of the country, is required to sell<br />
all of its production to that country at the competitive<br />
world market price, and, except for a provision<br />
for a cash settlement if the foreign country terminates<br />
the agreement, must recover its<br />
investment solely from production, is entitled to a<br />
depletion allowance and may exercise the option<br />
to capitalize or deduct its intangible drilling and<br />
development costs. §§1.263(c)-1, 1.612-4. (Secs.<br />
263, 612; ’86 Code)<br />
Rev. Rul. 73-470, 1973-2 C.B. 88.<br />
66.88 Intangible drilling and development<br />
costs; properties outside U.S. A taxpayer who<br />
holds the working or operating interest in oil and<br />
gas properties located outside the U.S. has the<br />
option to capitalize or expense the intangible drilling<br />
and development costs incurred with respect<br />
to those properties if he is required to report the<br />
income therefrom. §§1.263(c)–1, 1.612-4. (Secs.<br />
263, 612; ’86 Code.)<br />
Rev. Rul. 67-34, 1967-1 C.B. 72.<br />
66.89 Intangible drilling and development<br />
costs; recoupment; partly owned interests.<br />
Intangible drilling and development costs<br />
incurred by a taxpayer in drilling an oil and gas<br />
well under an agreement with the owner of oil and<br />
gas rights in a lease to receive an undivided part<br />
interest therein after completion of the well and to<br />
receive the entire operating interest income until<br />
recoupment (pay-out) of all such <strong>expenditures</strong>, are<br />
fully allowable as a deduction provided the proper<br />
election is made under reg. 1.612-4. No portion of<br />
such costs is required to be capitalized as deplet<br />
able leasehold acquisition costs. However, at payout,<br />
a portion of the undepreciated basis in the tangible<br />
equipment must be capitalized as deplet able<br />
leasehold acquisition costs. §§1.263(c)-1,<br />
1.612-4. (Secs. 263, 612; ’86 Code.)<br />
Rev. Rul. 69–332, 1969–1 C.B. 87.<br />
66.90 Intangible drilling and development<br />
costs; “turnkey” agreements. An individual<br />
who acquired an interest in an oil and gas lease<br />
from the original lessee well driller, under an<br />
agreement that required no payment for dry holes<br />
but payment of a specified amount to the driller at<br />
the completion of each of a stated number of wells<br />
that were completed as producers, has made capital<br />
<strong>expenditures</strong> that are not intangible drilling and<br />
development costs. §§1.263(c)–1, 1.612–4. (Secs.<br />
263, 612; ’86 Code.)<br />
Rev. Rul. 75-304, 1975-2 C.B. 94.<br />
66.91 Intangible drilling and development<br />
costs; water injection wells. Certain casts<br />
incurred by a taxpayer in the drilling of water<br />
injection wells necessary in the primary development<br />
of the oil property are “intangible drilling<br />
and development costs” and may, at the tax payer’s<br />
option, be chargeable to capital or to expense.<br />
§§1.263(c)-1, 1.612-4. (Secs. 263, 612; ’86<br />
Code.)<br />
Rev. Rul. 69-583, 1969-2 C.B. 41.<br />
66.92 Interest equalization tax; imposed retroactively.<br />
The interest equalization tax retroactively<br />
imposed on the acquisition of foreign stock<br />
and paid in a subsequent year is required to be<br />
capitalized and treated as part of the cost of the<br />
stock. (Secs. 263, 4911; ’86 Code.)<br />
Rev. Rul. 68-628, 1968-2 C.B. 117.<br />
66.93 Interest equalization tax; insurance<br />
companies. Interest equalization taxes paid by life<br />
and mutual insurance companies upon the acquisition<br />
of notes purchased at par from a foreign corporation<br />
qualify as amortizable bond premium.<br />
Interest equalization taxes that are reimbursed by<br />
the borrower are deductible as business expenses<br />
to the extent the reimbursements are included in<br />
gross income. This deduction must, however, be<br />
reduced by the amount of the adjustment for interest<br />
equalization tax that qualified as amortizable<br />
bond premium. §§1.171-1, 1.263(a)-1, 1.818-3,<br />
1.818-7, 1.822-8, 1.822-10. (Secs. 171, 263, 818,<br />
822; ’86 Code.)<br />
Rev. Rul. 68-85, 1968-1 C.B. 97.<br />
66.94 Investment property; interest and real<br />
property taxes. Accounting fees and general<br />
office costs incurred by a corporation whose sole<br />
activity is an investment in unimproved, non-income-producing<br />
real property are deductible<br />
under Section 162; interest and real property taxes<br />
incurred by the corporation may be deducted<br />
under section 163 and 164, respectively.<br />
§§1.162-1, 1.163-1, 1.164-1, 1.266-1. (Secs.<br />
162, 163, 164, 266; ’86 Code.)<br />
Rev. Rul. 78-195, 1978-1 C.B. 39.<br />
66.95 Land clearing <strong>expenditures</strong>; arid land<br />
converted into farm land. A taxpayer in the business<br />
of farming who with others undertook, under<br />
the Desert Land Act, the conversion of arid public<br />
land into land suitable for farming may deduct,<br />
under section 182(a), his pro rata share of costs for<br />
land levelling and clearing and for nondepreciable<br />
canal construction. However, the irrigation system<br />
with a pumping plant, penstocks, depreciable<br />
canals, steel mainlines, and portable sprinkler<br />
Iincs arc tangible assets subject to section 167, and<br />
<strong>expenditures</strong> incurred in perfecting land title are<br />
includable in the cost basis of the land.<br />
§§1.167(a)-2, 1.182-3, 1.263(a)-1. (Secs. 167,<br />
182, 263; ’86 Code.)<br />
Rev. Rul. 75-151, 1975-1 C.B. 88.<br />
66.96 Land improvement and construction;<br />
loan interest. A taxpayer who borrowed funds for<br />
land improvement and plant construction may<br />
elect to capitalize the loan interest for the current<br />
and subsequent taxable years even though he<br />
<strong>Capital</strong> <strong>expenditures</strong><br />
deducted such interest for the prior year,<br />
§1.266-1, (Sec. 266, ’86 Code.)<br />
Rev. Rul. 72-594, 1972-2 C.B. 199.<br />
66.97 Land preparation costs; electric and<br />
gas distribution systems. Amounts paid by the<br />
developer of a mobile home park to a public utility<br />
for underground electric and gas distribution systems<br />
are capital <strong>expenditures</strong> that are included in<br />
the developer’s cost basis of the land. Examples<br />
illustrate which land preparation costs may be<br />
depreciated by the developer and which must be<br />
included in the basis of the land. §§1.167(a)–2,<br />
1.263(a)-1. (Secs. 167, 263; ’86 Code.)<br />
Rev. Rul. 80-93, 1980-1 C.B. 50.<br />
66.98 Landfill; revetments and berm. The<br />
costs incurred in construction of steel cellular<br />
revetments and a stable slope berm outward from<br />
a lake shoreline, as part of a project to enclose and<br />
fill in an area of the lake to provide additional land<br />
for industrial facilities, and the costs of filling in<br />
the inclosed area are nondepreciable land acquisition<br />
costs. §§1.167(a)–2, 1.263(a)–1. (Secs. 167,<br />
263; ’86 Code.)<br />
Rev. Rul. 77-270, 1977-2 C.B. 79.<br />
66.99 Lease; cancellation payment. An<br />
amount paid by the lessor to cancel a warehouse<br />
lease to secure the warehouse for his own use is a<br />
capital expenditure amortizable over the lease’s<br />
unexpired term. The lessor’s subsequent lease of<br />
the warehouse to another lessee does not affect the<br />
period over which the cancellation payment is<br />
amortized. O.D. 397 superseded. §1.263(a)–1.<br />
(Sec. 263, ’86 Code.)<br />
Rev. Rul. 71-283, 1971-2 C.B. 168.<br />
66.100 Lease; modification; additional<br />
“rental” payments. Additional “rental” payments<br />
made over a part of the lease term, in accordance<br />
with a lease modification agreement, are<br />
capital <strong>expenditures</strong> amortizable over the full term<br />
of the lease. §§1.162–1, 1.263(a)–1. (Secs. 162,<br />
263; ’86 Code.)<br />
Rev. Rul. 73-176, 1973-1 C.B. 146.<br />
66.101 Leases; automotive equipment. Taxpayer<br />
leased automotive equipment from a bank<br />
under a trust agreement providing for rental payments<br />
equal to the costs incurred by the bank in<br />
acquiring titled, interest and incidental expenses.<br />
The bank held only bare legal title and the taxpayer<br />
was virtual owner of the vehicles and<br />
entitled to depreciate the cost, which included the<br />
rental pay ments, over the life of the equipment,<br />
rather than over the “lease” period. The “rental”<br />
payments constituted part payments for capital<br />
items and should be capitalized insofar as they<br />
represent capital payments. §§39.23(a)-10,<br />
39.23(1)-1, 39.24(a)-2. (Secs. 23(a), 23(1), 24(a),<br />
’39 Code; Secs. 162, 167, 263, ’86 Code.)<br />
Rev. Rul. 55-25, 1955-1 C.B. 283.<br />
66.102 Leases; oil and gas; acquisition fees. A<br />
taxpayer must capitalize as leasehold acquisition<br />
costs both money paid to a filing service company<br />
to file applications to lease Federal lands under<br />
noncompetitive simultaneous offer procedure and<br />
an additional amount paid for an option to sell an<br />
interest in any leases acquired with a concurrent<br />
guarantee by the company that if no leases are so<br />
acquired it will assign a lease and buy it back. If a<br />
lease is assigned and repurchased by the filing service<br />
company, the taxpayer’s loss, subject to treatment<br />
under section 1231(a), is the difference<br />
between the total amount paid to the company and<br />
the amount received on the repurchase. Modified<br />
by Rev. Rul. 80-176. §1.263(a)-1. (Sec. 263, ’86<br />
Code.)<br />
Rev. Rul. 77-395, 1977-2 C.B. 80.<br />
66.103 Leases; oil and gas; acquisition fees.<br />
Fees paid for services rendered in connection with<br />
the acquisition of noncompetitive government oil<br />
and gas leases must be capitalized by the applicant<br />
as part of the cost of acquisition of the leases
<strong>Capital</strong> <strong>expenditures</strong><br />
acquired and may be recoverable through depletion.<br />
Distinguished by Rev. Rul. 71–191.<br />
§1.611-1. (Sec. 611, ’86 Code.)<br />
Rev. Rul. 67-141, 1967-1 C.B. 153.<br />
66.104 Leases oil and gas; acquisitions;<br />
attempted negotiations. Geologists involved in<br />
the acquisition and disposition of oil and gas<br />
leases, obtained leases from some of the landowners<br />
within two large areas, but were unable to<br />
secure leases from others. Held, the costs allocable<br />
to the unsuccessful negotiations were deductible<br />
as losses incurred in transactions entered into for<br />
profit and not required to be capitalized and added<br />
to the basis of the leases acquired. (Secs. 165, 263;<br />
’86 Code.)<br />
Vincent T. Larsen, 66 T.C. 478, Acq., 1977-1<br />
C.B. 1.<br />
66.105 Legal and accounting expenses; registration<br />
of stock with S.E.C. Legal and accounting<br />
<strong>expenditures</strong> incurred by a corporation in registering<br />
its stock with the Securities and Exchange<br />
Commission constitute capital <strong>expenditures</strong> and,<br />
as such, are not deductible as business expenses.<br />
I.T. 3026 superseded. §§1.162-1, 1.263(a)-1.<br />
(Secs. 162, 263; ’86 Code.)<br />
Rev. Rul. 69-330, 1969–1 C.B. 51.<br />
66.106 Legal and accounting expenses;<br />
research project. The expenses for legal and<br />
accounting work incurred by a taxpayer in applying<br />
for a Federal income tax ruling in connection<br />
with a research and development project and a<br />
determination of a regulatory commission with<br />
respect to the effect of the project on the taxpayer’s<br />
rate structure are not deductible as research and<br />
experimental <strong>expenditures</strong>. The expenses, if not<br />
chargeable to capital account, are deductible business<br />
expenses. §§1.162–1, 1.174-2. (Secs. 162,<br />
174; ’86 Code.)<br />
Rev. Rul. 67-401, 1967-2 C.B. 123.<br />
66.107 Legal expenses; quiet title and<br />
accounting. Legal expenses incurred in a suit to<br />
quiet tide to mineral property and obtain an<br />
accounting for profits from the extraction and sale<br />
of oil by an trespasser were allocable, half to the<br />
collection of income and half to the quieting of<br />
title. (Sec. 23(a), ’39 Code; Sec. 212, ’86 Code.)<br />
Thomas E. Arnett, 31 T.C. 320, Acq., 1959-1<br />
C.B. 3.<br />
66.108 Legal expenses; settlement of suit to<br />
recover property. Under an agreement to compromise<br />
litigation between the taxpayer and her<br />
former husband, community property was sold<br />
and the taxpayer received half the proceeds which<br />
included gain. Held, only a portion of legal<br />
expenses was allocable to her recovered basis, the<br />
remainder was allocable to the recovery of her<br />
share of the gain and was a deductible expense.<br />
(Sec. 23(a), ’39 Code; Sec. 162, ’86 Code.)<br />
Agnes Pyne Coke, 17 T.C. 403, Nonacq. 1973-1<br />
C.B. 2.<br />
66.109 Legal expenses; suits involving business<br />
real property. Legal <strong>expenditures</strong> in curred<br />
in the successful prosecution of a suit to invalidate<br />
a municipal ordinance prohibiting the operation of<br />
taxpayer’s business are deductible business<br />
expenses. However, <strong>expenditures</strong> incumed, after<br />
the denial of a building permit to expand taxpayer’s<br />
business, in the successful prosecution of a<br />
suit to invalidate an ordinance prohibiting such<br />
expansion, or incurred in the unsuccessful challenge<br />
of a municipally established building line<br />
that adversely affected taxpayer’s business property,<br />
are nondeductible capital <strong>expenditures</strong>. I.T.<br />
1382 and Rev. Rul. 60–261 superseded.<br />
§§1.162-1, 1.263(a)-2. (Secs. 162, 263; ’86<br />
Code.)<br />
Rev. Rul. 78-389, 1978-2 C.B. 125.<br />
66.110 Legal expenses; tax advice on reorganization.<br />
Legal fees incurred by a corporation in<br />
securing advice on the tax consequences prior to<br />
the consummation of a merger with another corporation,<br />
a subsequent stock split, and proposed distribution<br />
in redemption of a portion of the outstanding<br />
stock are capital in nature and not<br />
deductible. However, in the event the proposed<br />
redemption is subsequently abandoned, the<br />
capitalized fees are deductible in the taxable year<br />
of abandonment. §§1.162–1, 1.263(a)–1. (Secs.<br />
162, 263; ’86 Code.)<br />
Rev. Rul, 67–125, 1967-1 C.B. 31.<br />
66.111 Legal expenses to invalidate trust. Litigation<br />
expenses paid or incurred in a suit to have<br />
a residuary trust declared void are capital <strong>expenditures</strong><br />
incurred in defending title to property.<br />
§39.23(a)-15. (Sec. 23(a), ’39 Code; Sec. 212, ’86<br />
Code.)<br />
Rev. Rul. 55-221, 1955-1 C.B. 275.<br />
66.112 Legal fees; concursus and declaratory<br />
judgment suits. Taxpayer deducted legal fees<br />
incurred in two court proceedings, one a declaratory<br />
judgment action in which taxpayer’s title to<br />
an overriding royalty interest was in dispute, and<br />
the other involving a claim to overriding royalty<br />
payments deposited in a local court. Held, only the<br />
portion allocable to the declaratory judgment was<br />
a nondeductible capital expenditure in the defense<br />
of title; the portion allocable to collecting accumulated<br />
royalties was a deductible expense to recover<br />
ordinary income. (Secs. 212, 263; ’86 Code.)<br />
Vincent Boagni, Jr., 59 T.C. 708, Acq., 1973-2<br />
C.B. 1.<br />
66.113 Liquefied petroleum gas; injected into<br />
hydrocarbon reservoir. Costs incurred for purchased<br />
liquefied petroleum gas injected into a<br />
hydrocarbon reservoir to increase recovery of<br />
native oil, to the extent not recoverable with subsequent<br />
production, are deductible in the year such<br />
losses can be determined; the remaining costs<br />
must be allocated and offset against sale proceeds.<br />
Modified to provide that the costs incurred after<br />
November 5, 1973, for such unrecoverable gas are<br />
capital <strong>expenditures</strong> subject to depreciation. However,<br />
the undepreciated portion of such gas is<br />
deductible as a loss in the year it can be determined<br />
that the remaining gas did not benefit production<br />
and the project is a failure. §§1.162–1, 1.165–1,<br />
1.167(a)-1, 1.263(a)-1, 301.7805-1. (Secs. 162,<br />
165,167, 263, 7805; ’86 Code.)<br />
Rev. Rul. 70-354, 1970-2 C.B. 50; Rev. Rul.<br />
73-469, 1973-2 C.B. 84.<br />
66.114 Literary works. Taxpayer, not engaged<br />
in the trade or business of writing, wrote and had<br />
published a manuscript of a literary composition.<br />
Held, expenses for secretarial help, etc., must be<br />
capitalized, and the total of such expenses is the<br />
taxpayer’s basis of the property. Income in excess<br />
of such basis must be reported as ordinary income.<br />
The amount paid the publisher as an inducement<br />
to publish the manuscript in book form must also<br />
be capitalized and allocated among the total number<br />
of copies published in the first edition.<br />
§§1.212-1, 1.263(a)-1, 1.1001-1, 1.1011-1,<br />
1.1012-1, 1.1221-1. (Secs. 212, 263, 1001, l011,<br />
1012, 1221; ’86 Code.)<br />
Rev. Rul. 68-194. 1968-1 C.B. 87.<br />
66.115 Litigation expenses; legal fees and<br />
settlement payment; stock title and negligence<br />
claim. Taxpayer paid a money settlement in a lawsuit<br />
involving the former employer’s claim to<br />
reacquire shares of stock and the employer’s<br />
threatened action against the taxpayer for negligent<br />
performance of his duties. Held, only a portion<br />
of the payment represented a charge against<br />
the capital gain which taxpayer realized upon sale<br />
of the stock; a portion of the payment was related<br />
to the threatened negligence claim and was<br />
deductible as a business expense. (Secs. 162, 263;<br />
’86 Code.)<br />
George Eisler, 59 T.C. 634, Acq., 1973-2 C.B.<br />
1.<br />
66.116 Litigation expenses; stock appraisal;<br />
reorganization matters. The “primary purpose”<br />
test developed in cases involving costs of defending<br />
property has no application to litigation<br />
expenses incurred to establish the value of stock<br />
required to be purchased from dissenting minority<br />
shareholders in reorganization matters.<br />
§§1.162-1, 1.212-1, 1.263(a)-2. (Secs. 162, 212,<br />
263; ’86 Code.)<br />
Woodward, 397 U.S. 572, Ct. D. 1939, 1970-1<br />
C.B. 56; Hilton Hotels Corp., 397 U.S. 580, Ct. D.<br />
1940, 1970-1 C.B. 59.<br />
66.117 Livestock; sale of investment property.<br />
A corporation “sells” animals to investors<br />
for nonrecourse notes and contracts to raise and<br />
breed the animals for an annual fee. The corporation<br />
guarantees to purchase any offspring for a<br />
specified price and guarantees to repurchase at a<br />
specified price after five years the animals originally<br />
sold to the investors. The original transaction<br />
is not a sale for federal income tax purposes, and<br />
the corporation remains owner of the animals during<br />
the contractual period. The investors are not<br />
entitled to depreciation or investment credit with<br />
respect to the animals, and the corporation must<br />
capitalize the cost of the animals. §§1.48–1,<br />
1.61-4, 1.162-12, 1.167(a)-1. (Secs. 48, 61, 162,<br />
167; ’86 Code.)<br />
Rev. Rul. 78-411, 1978-2 C.B. 112.<br />
66.118 Management fee; start-up <strong>expenditures</strong>;<br />
construction of offshore drilling rig. A<br />
cash-method, calendar-year limited partnership<br />
was organized in 1980 to acquire an offshore drilling<br />
rig to be constructed for it and to engage in<br />
contract drilling after the rig is completed in July,<br />
1981. The portion of a management fee paid to the<br />
managing partner for supervision of construction<br />
and financing of the rig is a capital expenditure.<br />
The portion of the fee attributable to the management<br />
of the partnership during the construction of<br />
the rig must also be capitalized, but that part of this<br />
amount paid or incurred after July 29, 1980, is a<br />
start-up expenditure, which the partnership may<br />
elect to deduct under section 195 of the Code.<br />
§§1.162-1, 1.263(a)-1. (Secs. 162, 195, 263; ’86<br />
Code.)<br />
Rev. Rul. 81-150, 1981–1 C.B. 119.<br />
66.119 Master recordings. The costs of master<br />
recordings used for substantially more than one<br />
year to produce phonograph records must be<br />
capitalized and recovered through depreciation.<br />
§§1.167(a)-1, 1.263(a)-1. (Secs. 167, 263; ’86<br />
Code.)<br />
Rev. Rul. 69-475, 1969–2 C.B. 40.<br />
66.120 Medical; air conditioner. To the extent<br />
it increased the value of his home, taxpayer was<br />
required to capitalize the cost of a central air<br />
conditioning unit recommended by a physician<br />
but the excess of such cost was deductible as a<br />
medical expense. (Sec. 263, ’86 Code.)<br />
Raymond Gerard, 37 T.C. 826, Acq. 1966-1<br />
C.B. 2.<br />
66.121 Mining; acquisition of adjacent land<br />
for dumping area. The cost of a tract of land containing<br />
an exhausted open-pit mine, purchased for<br />
use as a dumping area for overburden removed<br />
from an adjacent strip mine at a price greater than<br />
the going price of similar tracts containing no<br />
open-pit mine, is not deductible as a development<br />
expenditure. The entire cost must be capitalized,<br />
but the portion attributable to the exhausted openpit<br />
mine is an expenditure for an asset that is depreciable<br />
over its useful life based on the capacity of<br />
the open pit and the rate of dumping overburden<br />
into it. §§1.167(a)–1, 1.616–1. (Secs. 167, 616;<br />
’86 Code.)<br />
Rev. Rul. 74–282, 1974-1 C.B. 150.
66.122 Mining; rights to adjacent lands. Costs<br />
incurred for the acquisition of stripping rights to<br />
surface lands adjoining producing properties of<br />
the taxpayer, the right to mine copper from<br />
beneath those lands, the right to dump waste on<br />
certain other lands, and various other rights, are<br />
capital <strong>expenditures</strong> incurred for the acquisition of<br />
additional rights, to be recovered through depletion<br />
and not deductible as development ex penditures.<br />
Kennecott Copper Corp. decision not followed.<br />
§1.616-1. (Sec. 616, ’86 Code.)<br />
Rev. Rul. 67–35, 1967-1 C.B. 159.<br />
66.123 Mining; road construction. Expenditures<br />
for the construction of a road solely for transport<br />
of equipment and supplies from the nearest<br />
seaport shipping point to an inaccessible mining<br />
area are not mine development <strong>expenditures</strong>. The<br />
<strong>expenditures</strong> are recoverable by depreciation or<br />
amortization over a period not to exceed the term<br />
of a mining concession under an agreement with<br />
a foreign government. §§1.167(a)–2, 1.616–1.<br />
(Secs. 167, 616; ’86 Code.)<br />
Rev. Rul. 73-488, 1973-2 C.B. 207.<br />
66.124 Mortgage acquisition costs. Finders<br />
fees (buying commissions) paid to brokers, title<br />
companies, and other third parties by banks in connection<br />
with the placement of mortgage loans<br />
constitute a part of the mortgage acquisition cost<br />
to be capitalized and amortized over the lives of<br />
the applicable mortgage loans. §39.113(b)(1)-4.<br />
(Sec. 113(b), ’39 Code; Sec. 1016, ’86 Code.)<br />
Rev. Rul. 57-400, 1957–2 C.B. 520.<br />
66.125 Nuclear fuel elements. The purchase<br />
costs of nuclear fuel elements used to power<br />
nuclear reactor plants generating electricity are<br />
capital <strong>expenditures</strong> subject to depreciation. The<br />
useful lives and salvage values of the fuel elements<br />
are questions of fact. Clarified concerning<br />
the terminology used for the nuclear fuel assemblies.<br />
§§1.167(a)-1, 1.263(a)-2. (Secs. 167, 263;<br />
’86 Code.)<br />
Rev. Rul. 72–507, 1972–2 C.B. 198; Rev. Rul.<br />
74-237, 1974-1 C.B. 7.<br />
66.126 Office equipment; member of congress;<br />
purchase with personal funds. Amounts<br />
paid by a member of congress from his personal<br />
funds, in excess of his annual Congressional<br />
allowance, for reasonable salaries of additional<br />
staff employees necessary to handle an unusually<br />
heavy workload are deductible as business<br />
expenses incurred as an employee. However,<br />
amounts he paid for additional office equipment<br />
under such circumstances are capital <strong>expenditures</strong><br />
subject to depreciation. A net loss incurred in the<br />
operation of the member’s office because of heavy<br />
initial expenses will not preclude deduction of the<br />
full amount of his business expenses. O.D. 310<br />
superseded. §§1.167(a)-1, 1.163(a)–2. (Secs.<br />
167, 263; ’86 Code.)<br />
Rev. Rul. 73-464, 1973-2 C.B. 35.<br />
66.127 Oil and gas leases; acquisition fees. An<br />
explanation is provided of the tax treatment of (1)<br />
fees paid to a corporation that provides expert geological<br />
advice and files applications to acquire<br />
noncompetitive federal oil and gas leases, (2) fees<br />
paid for an option to sell an interest in any leases<br />
acquired, and (3) fees allocable to the corporation’s<br />
practice of offering to purchase a specified<br />
fractional interest in acquired leases. Rev. Rul.<br />
77-395 modified and clarified; Rev. Rul. 71-191<br />
distinguished. §§1.165-1, 1.263(a)–1,<br />
301.7805-1. (Secs. 165, 263, 7805; ’86 Code.)<br />
Rev. Rul. 80-176, 1980-2 C.B. 97.<br />
66.128 Oil and gas leases; acquisition fees;<br />
5-year program. A fee paid by an investor to participate<br />
in a five-year program to acquire federal<br />
oil and gas leases is a capital expenditure includable<br />
in the basis of any leases acquired. Furthermore,<br />
since an investor who does not acquire any<br />
leases during the five-year term of the program<br />
receives a refund of the fee paid, the investor has<br />
not sustained any uncompensated loss within the<br />
meaning of section 165(a). §1.165–1. (Sec. 165,<br />
’86 Code.)<br />
Rev. Rul. 83-137, 1983-2 C.B. 41.<br />
66.129 Oil and gas properties; installation of<br />
production facilities. <strong>Capital</strong> <strong>expenditures</strong><br />
incurred in installing certain facilities for the production<br />
of oil and gas are not intangible drilling<br />
and development costs subject to the option provided<br />
by reg. 1.612-4. Such <strong>expenditures</strong> are<br />
recoverable only through depreciation allowances.<br />
Mim. 6754 superseded. §§1.263(c)-1,<br />
1.612-4. (Secs. 263, 612; ’86 Code.)<br />
Rev. Rul. 70-414, 1970-2 C.B. 132.<br />
66.130 Oil and gas properties; underground<br />
storage; drilling costs. The cost of drilling wells<br />
to adapt a subsurface aquifer formation for use as<br />
a natural gas storage reservoir are capital <strong>expenditures</strong><br />
recoverable through depreciation.<br />
§§1.167(a)-2, 1.263(a)-1, 1.612-4. (Secs. 167,<br />
263, 612; ’86 Code.)<br />
Rev. Rul. 75–235, 1975-1 C.B. 97.<br />
66.131 Oil and gas properties; underground<br />
storage; easements. The costs of easements, surveys,<br />
engineering studies, testing, property damage,<br />
and rights to use a subsurface aquifer reservoir<br />
for gas storage purposes are capital<br />
<strong>expenditures</strong> recoverable through depreciation,<br />
§§1.167(a)-3, 1.263(a)-1. (Secs. 167, 263; ’86<br />
Code.)<br />
Rev. Rul. 75-234, 1975–1 C.B. 96.<br />
66.132 Oil and gas properties; under ground<br />
storage; unrecoverable gas. The cost of natural<br />
gas injected into an underground aquifer reservoir<br />
and determined to be unrecoverable is a capital<br />
expenditure recoverable through depreciation.<br />
§§1.167(a)-1, 1.263(a)-1. (Secs. 167, 263; ’86<br />
Code.)<br />
Rev. Rul. 75–233, 1975-1 C.B. 95.<br />
66.133 “On sale” liquor license; California.<br />
The amount paid by a taxpayer as consideration<br />
for the assignment of a license to engage in the “on<br />
sale” liquor business in California is a capital<br />
investment that must be carried on his books as a<br />
capital asset until such time as the license is again<br />
transferred or terminated. A deduction for<br />
depreciation or obsolescence is not allowable. I.T.<br />
3873 superseded. §§1.263(a)-1, 1.1221-1. (Secs.<br />
263, 1221; ’86 Code.)<br />
Rev. Rul. 70-248, 1970-1 C.B. 172.<br />
66.134 Organization <strong>expenditures</strong>. Organizational<br />
<strong>expenditures</strong> which a taxpayer properly<br />
elects to amortize and deduct currently may be so<br />
deducted even though such <strong>expenditures</strong> are<br />
reflected on the taxpayer’s books as capital <strong>expenditures</strong>.<br />
§1.248-1. (Sec. 248, ’86 Code.)<br />
Rev. Rul. 67–15, 1967–1 C.B. 71.<br />
66.135 Organization <strong>expenditures</strong>; partnership;<br />
payment to partner. A limited partnership’s<br />
payments to one of its general partners for<br />
services he rendered in organizing the partnership<br />
are payments described in section 707, constitute<br />
capital <strong>expenditures</strong> under section 263, and are not<br />
deductible under section 162. §§1.162-1,<br />
1.263(a)-1, 1.707-1. (Secs. 162, 263, 707; ’86<br />
Code.)<br />
Rev. Rul. 75–214, 1975–1 C.B. 185.<br />
<strong>Capital</strong> <strong>expenditures</strong><br />
66.136 Out of court settlement; actual and<br />
threatened claims; acquisition of stock. The<br />
entire amount of an out-of-court payment made by<br />
an individual, a shareholder and director of a<br />
domestic corporation, in settlement of both an<br />
actual claim against the individual under section<br />
10(b) of the Securities Exchange Act of 1934 and<br />
various threatened claims, all relating to the individual’s<br />
acquisition of the stock of the corporation,<br />
is a capital expenditure, not a business<br />
expense deductible under section 162(a) of the<br />
Code. §§1.162-1, 1.263(a)-1. (Secs. 162, 263; ’86<br />
Code.)<br />
Rev. Rul. 80-l19, 1980–1 C.B. 40.<br />
66.137 Passenger automobiles; section 179<br />
deduction. Guidance is provided to taxpayers<br />
who made elections under section 179, to expense<br />
amounts that exceed the dollar limitations<br />
imposed by section 280F(a)(2). §1.280F-2T. (Sec.<br />
601.602, S.P.R.; Secs. 179, 280F, ’86 Code.)<br />
Rev. Proc. 86-48, 1986–2 C.B. 745.<br />
66.138 Payments for surrender of bonds.<br />
Amounts paid directly to a bondholder by the corporation’s<br />
shareholders in a consideration of the<br />
surrender of bonds to the corporation are capital<br />
investments increasing the basis of the stock and<br />
are not allowable deductions in determining the<br />
taxpayer’s income. S.M. 2611 superseded.<br />
§1.263(a)-1. (Sec. 263, ’86 Code.)<br />
Rev. Rul. 69–64, 1969–1 C.B. 85.<br />
66.139 Pennsylvania bonus required of foreign<br />
corporations. The bonus previously<br />
required by Pennsylvania to be paid by a foreign<br />
organization on capital actually employed in that<br />
State does not constitute an allowable deduction<br />
during such time as the organization remains in<br />
existence and the capital stock, or its equivalent,<br />
remains outstanding. §§39.23(c)–1, 39.23(g)–1.<br />
(Secs. 23(c), 23(g), ’39 Code; Secs. 164, 165, ’86<br />
Code.)<br />
Rev. Rul. 55-48, 1955-1 C.B. 281.<br />
66.140 Pistachio tree growers. A grower of<br />
pistachio nuts who is not subject to section 278(b)<br />
or 447 may currently deduct the costs of maintaining<br />
and transplanting pistachio seedlings, both<br />
before and after the first budding of the trees in the<br />
field. The grower, however, must capitalize the<br />
costs of initial planting and budding of the trees.<br />
Rev. Rul. 75-405 revoked. §§1.162-12,<br />
1.263(a)-1. (Secs. 162, 263; ’86 Code.)<br />
Rev. Rul. 83-28, 1983-1 C.B. 47.<br />
66.141 Postal lock boxes; furnished by postmaster.<br />
Postmasters who are required to furnish<br />
lock boxes or fixtures for the use of the public may<br />
deduct such costs either as a current business<br />
expense or recover such costs through annual<br />
depreciation charges. Where the lock boxes or fixtures<br />
purchased by a postmaster are held in excess<br />
of six months, they qualify as “property used in<br />
trade of business” for section 1231 purposes.<br />
§39.23(a)-1. (Sec. 23(a), ’39 Code; Secs. 162,<br />
167, 1231, ’86 Code.)<br />
Rev. Rul. 55-579, 1955–2 C.B. 47.<br />
66.142 Premium time or overtime; expedite<br />
construction; rolling mill. Premium time or<br />
overtime paid or incurred by a corporation,<br />
engaged in the manufacture of steel and steel products,<br />
solely to expedite the installation of additional<br />
stands in its rolling mill in order to minimize<br />
the shutdown time while the new equipment was<br />
being installed must be capitalized. §§1.162-1,<br />
1.263(a)-2. (Secs. 162, 263; ’86 Code.)<br />
Rev. Rul. 70-332, 1970–1 C.B. 31.<br />
66.143 Preventive measures against storm<br />
losses. Property damage losses due to abnormally<br />
high water levels on bodies of water are deductible<br />
as casualty losses if they are directly attributable<br />
to a storm or other casualty and are not caused by<br />
gradual erosion or inundation from normal seasonal<br />
variations in water levels. However,<br />
amounts expended for construction of protective<br />
works or for moving homes from their original<br />
locations to prevent probable losses from future<br />
storms constitute capital <strong>expenditures</strong> rather than<br />
deductible casualty losses. Rev. Rul. 79 superseded.<br />
§§1.165–7, 1.263(a)–1. (Secs. 165, 263;<br />
’86 Code.)<br />
Rev. Rul. 76-134, 1976–1 C.B. 54.
<strong>Capital</strong> <strong>expenditures</strong><br />
66.144 Promotional payments; public utility.<br />
Promotional payments in the form of cash allowances<br />
made by a public utility company to individuals<br />
or building contractors to encourage<br />
construction of “all gas” homes or to convert<br />
heating, hot water, or other systems to gas are capital<br />
in nature recoverable through depreciation.<br />
The investment credit will not be allowed for these<br />
assets. The other <strong>expenditures</strong>, such as salaries<br />
and advertising, are deductible business expenses,<br />
Distinguished by Rev. Rul. 69–331 with respect to<br />
bonuses and commissions paid to secure hot water<br />
heater leases. §§1.38-1, 1.48-1, 1.162-1,<br />
1.167(a)-3, 1.263(a)–2, 1.461-1. (Secs. 38, 48,<br />
162, 167, 263, 461; ’86 Code.)<br />
Rev. Rul. 68-561, 1968-2 C.B. 117.<br />
66.145 Protection of investment; bankruptcy<br />
reorganization. The taxpayer, whose business<br />
was the investment in securities of other companies<br />
owned over half the common stock of a corporation<br />
which became involved in a bankruptcy<br />
reorganization plan. The plan alloted no value to<br />
the stock and the taxpayer incurred expenses in<br />
successfully opposing it and proposing a plan<br />
alloting a value. Held, the expenses were deductible<br />
business expenses, not capital <strong>expenditures</strong>,<br />
(Sec. 23(a), ’39 Code; Sec. 162, ’86 Code.)<br />
Alleghany Corp., 28 T.C. 298, Acq., 1957-2<br />
C.B. 3.<br />
66.146 Public utility; inside wiring account.<br />
The cost charged to the inside wiring account of a<br />
public telephone company is a capital expenditure<br />
under section 263 and must be recovered under<br />
section 168. §§1.162–1, 1.263(a)–2. (Secs. 162,<br />
168, 263; ’86 Code.)<br />
Rev. Rul. 84-24, 1984–1 C.B. 89.<br />
66.147 Public utility; light watchmen and<br />
customer extensions. Expenditures made by a<br />
regulated public utility in installing “light watchmen”<br />
on customers’ premises and in extending its<br />
distribution system to service additional residential<br />
customers are excluded additions that must be<br />
capitalized and are not deductible <strong>expenditures</strong> as<br />
a part of the repair allowance under the CLADR<br />
system. §§1.167(a)–11, 1.263(f)-1. (Secs. 167,<br />
263; ’86 Code.)<br />
Rev. Rul. 78–67, 1978–1 C.B. 64.<br />
66.148 Public utility; replacement of lines.<br />
Expenditures incurred by a regulated public utility<br />
for the installation of new sections of overhead<br />
and underground electric transmission and distribution<br />
lines to take the place of retired lines that<br />
interfered with the construction of an expressway<br />
are capital <strong>expenditures</strong>. However, the costs of<br />
temporary relocations of existing power lines to<br />
maintain continuous service during the construction<br />
period of less than a year are deductible as<br />
business expenses. §1.263(a)-1. (Sec. 263, ’86<br />
Code.)<br />
Rev. Rul. 73-203, 1973-1 C.B. 146.<br />
66.149 Public utility; telephone wires<br />
replaced with buried cable. The cost of replacing<br />
telephone wires with buried cable is to be capitalized<br />
and depreciated over the useful life of the<br />
cable. §§1.162-4, 1.167(a)–1, 1.263(a)–2. (Secs.<br />
162, 167, 263; ’86 Code.)<br />
Rev. Rul. 82-12, 1982-1 C.B. 52.<br />
66.150 Public utility company; conversion of<br />
customers’ heating equipment. Amounts<br />
expended by a public utility company to convert<br />
or adapt its customers’ steam heating equipment to<br />
the use of gas are capital <strong>expenditures</strong> recoverable<br />
through depreciation. In computing the depreciation<br />
deduction under section 167 the methods<br />
described in subsection (b)(2), (3), and (4) may not<br />
be used. §§1.162-1, 1.167(a)-3, 1.263(a)-2.<br />
(Secs. 162, 167, 263; ’86 Code.)<br />
Rev. Rul. 71-469, 1971-2 C.B. 120.<br />
66.151 Railroads; classification yard; rearranged<br />
and reconstructed; retirement method.<br />
A railroad company, using the “retirement<br />
method” of accounting for depreciation of its<br />
track account assets, incurred certain costs to rearrange<br />
and reconstruct its classification yard, Held,<br />
(1) the adjusted basis and removal costs of the<br />
tracks removed and not replaced less the salvage<br />
value of the recovered materials are recoverable<br />
through depreciation; (2) the cost, including labor,<br />
for constructing new tracks and of betterment portions<br />
of the replacements are capitalized <strong>expenditures</strong>;<br />
and (3) the remaining costs, including labor,<br />
for installing the replacements (less the capitalized<br />
betterment portion) less salvage value of<br />
recovered materials are recoverable through<br />
depreciation. §§1.167(a)–1, 1.263(a)–1. (Secs.<br />
167, 263; ’86 Code.)<br />
Rev. Rul. 69-476, 1969-2 C.B. 40.<br />
66.152 Railroads; construction of stateowned<br />
bridge. Costs incurred by a railroad company<br />
for the construction of a state-owned bridge<br />
over its tracks are capital <strong>expenditures</strong> amortizable<br />
over the estimated time the bridge will be in<br />
use; future maintenance costs are deductible business<br />
expenses when paid or incurred. §§1.162-4,<br />
1.167(a)-3, 1.263(a)-1. (Secs. 162, 167, 263; ’86<br />
Code.)<br />
Rev. Rul. 69-229, 1969–1 C.B. 86.<br />
66.153 Railroads; cross ties replaced. When a<br />
railroad company uses the retirement-replacement-betterment<br />
method of accounting, the cost of<br />
replacing wood cross ties with concrete ties is to<br />
be expensed as a replacement. Rev. Rul. 68-418<br />
revoked. §§1.167(a)–1, 1.263(a)–1. (Secs. 167,<br />
263; ’86 Code.)<br />
Rev. Rul. 84-22, 1984-1 C.B. 35.<br />
66.154 Railroads; reballasting track; retirement<br />
method. The cost for reballasting tracks<br />
incurred by a railroad using the “retirement<br />
method” of accounting for depreciation of its<br />
track structure is to be capitalized where additional<br />
ballast applied results in the ballast depth<br />
being increased and the track raised, but the cost<br />
of the ballast that merely replaces the old ballast<br />
is an expense, where a superior type of ballast is<br />
used, the excess cost of the superior ballast over<br />
the cost of replacing the original ballast is capitalized;<br />
and labor costs to resurface the tracks as a<br />
result of reballasting are expensed regardless of<br />
whether the ballast cost is capitalized or expensed,<br />
§§1.162-4, 1.263(a)-1. (Secs. 162, 263; ’86<br />
Code.)<br />
Rev. Rul. 70-1, 1970–1 C.B. 54.<br />
66.155 Railroads; reconstruction of track<br />
embankment. The costs of a major construction<br />
project that is undertaken to protect a long section<br />
of railroad track embankment from water damage<br />
and includes the construction of a channel diversion<br />
of a river, concrete dikes, dams, and jetties,<br />
the installation of riprap, the extension and elevation<br />
of certain bridges, and pressure grouting and<br />
pole driving to firm-up the embankment are nondeductible<br />
capital <strong>expenditures</strong>. The cost of pole<br />
driving and pressure grouting of an incidental<br />
nature not related to the major construction project,<br />
however, may be deducted currently. The Service<br />
will not follow the Chicago, Burlington &<br />
Quincy R.R. Co, decision. Rev. Ruls. 54–356 and<br />
58-278 superseded. §§1.162-4, 1.263(a)-1.<br />
(Secs. 162, 263; ’54 Code.)<br />
Rev. Rul. 77-478, 1977-2 C.B. 81.<br />
66.156 Railroads; repairs; emergency equipment.<br />
The determination of whether an expenditure<br />
for repairs is to be classified as a deductible<br />
expense or a capital expenditure is not affected by<br />
the fact that the asset has been amortized in full or<br />
in part as an emergency facility. §39.23(a)4.<br />
(Sec. 23(a), ’39 Code; Sec. 162, ’86 Code.)<br />
Rev. Rul. 54-578, 1954-2 C.B. 84.<br />
66.157 Railroads; restoration of freight cars;<br />
programmed <strong>expenditures</strong>. Programmed <strong>expenditures</strong><br />
for the major restoration of railroad<br />
freight-train cars that extend the useful life of the<br />
cars beyond the years used for depreciation purposes<br />
must recapitalized or charged to the reserve<br />
account and recovered through depreciation.<br />
§§1.162-4, 1.263(a)-1. (Secs. 162, 263; ’86<br />
Code.)<br />
Rev. Rul. 69-116, 1969-1 C.B. 85.<br />
66.158 Railroads; road crossings; retirement<br />
method. Costs for replacement of railway road<br />
crossings over railroad tracks are included in the<br />
term “section 38 property.” The retirement-replacement<br />
method of accounting for depreciation<br />
of crossings and the charge to expense of replacement<br />
costs are not proper. Such costs must be<br />
capitalized and depreciated over the useful lives of<br />
the crossings. §§1.48–1, 1.167(a)-1, 1.263(a)-1.<br />
(Secs. 48, 167, 263; ’86 Code.)<br />
Rev. Rul. 80-187, 1980-2 C.B. 19.<br />
66.159 Railroads; welded rail costs; retirement<br />
method. Where a railroad uses the retirement<br />
and replacement accounting method for<br />
depreciation, the initial costs of welding rail segment<br />
together are to be capitalized since a permanent<br />
improvement or betterment of the track has<br />
been effected. Where the welded rail is replaced<br />
with welded rail of the same kind and quality, no<br />
further betterment is involved and the rail replacement<br />
and labor costs, less the salvage value of the<br />
recovered rail, are properly charged to expense.<br />
Where joint or angle bars are retired because welding<br />
occurred, the unrecovered capitalized costs<br />
(including the original labor cost of installation) of<br />
the joint or angle bars, less their salvage value, are<br />
properly charged to expense. §§1.167(a)-1,<br />
1.263(a)-1. (Secs. 167, 263; ’86 Code.)<br />
Rev. Rul. 67-22, 1967-1 C.B. 52.<br />
66.160 Recreational facility purchased and<br />
conveyed to employees’ association. To attract<br />
new employees and reduce turnover during wartime<br />
labor shortage and increased business, taxpayer<br />
in 1944 purchased a small farm some distance<br />
from its business site, made improvements,<br />
and conveyed the farm to its foremen’s association<br />
for recreational use by company employees. Held,<br />
the cost of the farm and improvements were<br />
deductible business expenses, not capital <strong>expenditures</strong>.<br />
(Secs. 23(a), 24(a), ’39 Code; Secs. 162,<br />
263, ’86 Code.)<br />
Slaymaker Lock Co., 18 T.C. 1001, Acq.,<br />
1953-2 C.B. 6.<br />
66.161 Reforestation. Generally, direct costs of<br />
reforestation including girdling, herbicide<br />
application, baiting of rodents, labor and tool<br />
expense, and planting and seeding equipment<br />
depreciation are capital <strong>expenditures</strong> recoverable<br />
through depletion allowances when the timber is<br />
cut or as adjusted basis if the timber is sold. Indirect<br />
costs, deducted in the year incurred or capitalized<br />
cumulatively under section 266, include<br />
interest paid on money borrowed or service<br />
charges on performance bonds in lieu thereof to<br />
satisfy a state law requiring a deposit to guarantee<br />
reforestation. Rev. Rul. 55–252 superseded.<br />
§§1.263(a)-1, 1.611-1, 1.1011-1. (Secs. 263, 611,<br />
1011; ’86 Code.)<br />
Rev. Rul. 75-467, 1975-2 C.B. 93.<br />
66.162 Reforestation. Cost sharing payments<br />
received from the Federal government under the<br />
forestry incentives program of the Agriculture and<br />
Consumer Protection Act of 1973 are includable in<br />
income, and the total costs of reforestation (not<br />
diminished by such payments) are to be capitalized<br />
as a cost of timber. §§1.61–1, 1.263(a)–1,<br />
1.611-3. (Secs. 61, 263, 611; ’86 Code.)<br />
Rev. Rul. 76-6, 1976–1 C.B. 176.<br />
66.163 Reforestation. The <strong>expenditures</strong> for<br />
destroying undesirable hardwood trees and brush<br />
in naturally reforested stands of southern pine
young growth are related to the seeding and establishment<br />
of the pine seedlings and are capital<br />
<strong>expenditures</strong> recoverable through depletion.<br />
§1.611-3. (Sec. 611, ’86 Code.)<br />
Rev. Rul. 76-290, 1976-2 C.B. 188.<br />
66.164 Reforestation; replacing dead seedlings.<br />
A timber producer sustains no deductible<br />
loss on the death, not due to casualty, of tree seedlings<br />
planted to reforest land from which it has harvested<br />
the mature timber. Amounts paid or<br />
incurred in replanting to replace the lost seedlings<br />
must be capitalized in accordance with reg.<br />
1.611–3(a). §§1.165–1, 1.611–1, 1.611–3. (Secs.<br />
165, 611; ’86 Code.)<br />
Rev. Rul. 81-2, 1981-1 C.B. 78.<br />
66.165 Rehabilitation of railroad cars. Cyclical<br />
<strong>expenditures</strong> for major rehabilitations of railroad<br />
freight-train cars are capital <strong>expenditures</strong><br />
under section 263(a). §§1.162-4, 1.167(a)–11,<br />
1.263(a)-1. (Secs. 162, 167, 263; ’86 Code.)<br />
Rev. Rul. 88-57, 1988-2 C.B. 36.<br />
66.166 Release from option. The amount paid<br />
by a corporation to obtain release from an existing<br />
option, in order to present a clear and free title to<br />
its tangible assets and property in connection with<br />
its entering into a reorganization agreement,<br />
constitutes an additional cost of the tangible assets<br />
and property of such corporation should be allocated<br />
among the various assets covered by the<br />
option. (Sec. 263, ’86 Code.)<br />
Rev. Ru1. 55-557, 1955-2 C.B. 60.<br />
66.167 “Rent-up” fee paid to apartment<br />
management company. In connection with the<br />
development of a low-income housing complex, a<br />
limited partnership will pay a “rent-up” fee to an<br />
apartment management company to obtain tenants<br />
during the “rent-up” period and a permanent loan<br />
commitment fee to a lender for the lender’s promise<br />
to provide permanent financing upon the<br />
completion of the complex. The “rent-up” fee is<br />
a capital expenditure and must be amortized over<br />
the terms of the leases obtained and the permanent<br />
loan commitment fee must be capitalized and<br />
amortized over the loan term. §1.461–1. (Sec. 461,<br />
’86 Code.)<br />
Rev. Rul. 81–161, 1981–1 C.B. 313.<br />
66.168 Reorganization expenses paid by<br />
shareholders. Brokerage, legal, accounting and<br />
related expenses of a corporation which were<br />
assessed to and paid by its shareholders under a<br />
qualified plan of reorganization whereby the corporation<br />
acquired all of the voting stock of another<br />
corporation in exchange for its assets and distributed<br />
the stock to its shareholders in liquidation of<br />
the corporation are capital <strong>expenditures</strong> and are<br />
not deductible under section 212. Each shareholder<br />
may add the amount of such expenses<br />
which he paid to his basis in the stock he acquired<br />
pursuant to the reorganization. §§1.212–1,<br />
1.263(a)-1. (Secs. 212, 263; ’86 Code.)<br />
Rev. Rul. 67-411, 1967-2 C.B. 124.<br />
66.169 Repairs; general betterment programs.<br />
Taxpayer’s facilities needed repair, and<br />
after bankruptcy and a change in management, the<br />
profits earned were returned to the business as it<br />
modernized its operations. The Commissioner<br />
contended that the repair items were part of a general<br />
betterment program and should be capitalized<br />
even though, taken individually, they would be<br />
deductible as ordinary expenses. Held, no betterment<br />
program was in progress, and the expenses<br />
were deductible. (Sec. 23(a), ’39 Code; Sec. 162,<br />
’86 Code.)<br />
Keller Street Development Co., 37 T.C. 559,<br />
Acq., 1962-2 C.B. 5.<br />
66.170 Road grading and paving costs. Costs<br />
of grading and paving a road in connection with<br />
the development of a subdivision of rental property<br />
are nondeductible capital <strong>expenditures</strong> and<br />
are added to the basis of the property. Rev. Rul.<br />
55-253 superseded. §1.263(a)-1. (Sec. 263, ’86<br />
Code.)<br />
Rev. Rul. 73-377, 1973-2 C.B. 84.<br />
66.171 Road improvement by county. The<br />
amount paid to a county on a promissory note<br />
conditioned on, and payable upon, the county<br />
hard-surfacing the roads in the vicinity of the taxpayer’s<br />
property is not deductible as a charitable<br />
contribution; however, the amount paid is a capital<br />
expenditure. §§1.170A-1, 1.263(a)–1. (Secs. 170,<br />
263; ’86 Code.)<br />
Rev. Rul. 76-257, 1976-2 C.B. 52.<br />
66.172 Road paving. A dead end street adjoining<br />
taxpayer’s warehouse constituted property<br />
used in taxpayer’s trade or business and the cost of<br />
paving such road was a capital expenditure depreciable<br />
over a 20-year period. (Sec. 23(1), ’39<br />
Code; Sec. 167, ’86 Code.)<br />
D. Loveman & Son Export Corp., 34 T.C. 776,<br />
Acq., 1961-2 C.B. 5.<br />
66.173 Ship registry. Payments received pursuant<br />
to an agreement to retain ships under American<br />
registry so that the payor may transfer like<br />
ships to foreign registry under a temporary Maritime<br />
Administration policy are ordinary income<br />
and not capital gain since the agreement does not<br />
constitute a sale or exchange of property. The payments<br />
constitute capital <strong>expenditures</strong> to the payor<br />
since the value of such ships is increased.<br />
§1.1221-1. (Secs. 263, 1221; ’86 Code.)<br />
Rev. Rul. 58-296, 1958-1 C.B. 276.<br />
66.174 Sprinkler system; lease v. conditional<br />
sale. A renewable lease for the installation and use<br />
of an automatic sprinkler system was a contract for<br />
a conditional sale where the annual payments for<br />
the first five-year period of the lease approximated<br />
the cost of the system and of its installation. The<br />
amounts paid as “rent,” except to the extent representing<br />
interest or currently deductible charges,<br />
are capital <strong>expenditures</strong> recoverable through<br />
annual deductions for depreciation over the estimated<br />
life of the sprinkler system. §1.167(a)–1.<br />
(Secs. 167, 263; ’86 Code.)<br />
Rev. Rul. 57-371, 1957-2 C.B. 214.<br />
66.175 Stock dividend costs. The cost incurred<br />
by a corporation in connection with the issuance<br />
of its capital stock in payment of a stock dividend<br />
is a capital expenditure. §§1.162–1, 1.263(a)–1.<br />
(Secs. 162, 263; ’86 Code.)<br />
Rev. Rul. 60-254, 1960-2 C.B. 42.<br />
66.176 Stock exchange seats purchased; partnership<br />
funds. Amounts paid out of partnership<br />
funds for seats on stock exchanges and registered<br />
in the names of individual members of the partnership<br />
are capital <strong>expenditures</strong>. O.D. 473 superseded.<br />
§1.263(a)–1. (Sec. 263, ’86 Code.)<br />
Rev. Rul. 70-334, 1970-1 C.B. 56.<br />
66.177 Stock offering by trust. Expenses<br />
incurred by a trust and other shareholders in preparation<br />
for the public offering of stock must be<br />
capitalized; however, if the planned offering is<br />
later abandoned because of unfavorable market<br />
conditions, the capitalized <strong>expenditures</strong> are<br />
deductible as losses under section 165 in the year<br />
of the abandonment. §§165-2, 1.212-1,<br />
1.263(a)-1. (Secs. 165, 212, 263; ’86 Code.)<br />
Rev. Rul. 79-2, 1979-1 C.B. 98.<br />
66.178 Stock or liquidating dividend payments<br />
on borrowed stock; short sales. Loan premiums<br />
paid by an investor in securities in the<br />
acquisition of stock borrowed to cover short sales<br />
and amounts equal to ordinary cash dividends paid<br />
with respect to such stock are deductible. However,<br />
amounts paid by investors or traders with<br />
respect to nontaxable stock dividends or liquidating<br />
dividends on such borrowed stock are capital<br />
<strong>expenditures</strong> and are not deductible. I.T. 3989 and<br />
<strong>Capital</strong> <strong>expenditures</strong><br />
Rev. Rul. 60-359 superseded. §§1.212-1,<br />
1.263(a)-1. (Secs. 212, 263; ’86 Code.)<br />
Rev. Rul. 72-521, 1972–2 C.B. 178.<br />
66.179 Survey of shopping center. A survey of<br />
the taxpayer’s shopping center was made in connection<br />
with an unsuccessful attempt to obtain<br />
permanent financing, not for the acquisition of<br />
property and its cost was a deductible business<br />
expense. (Sec. 162, ’86 Code.)<br />
Herbert Shainberg, 33 T.C. 241, Acq., 1960-2<br />
C.B. 7.<br />
66.180 Swimming pool; medical. Taxpayer’s<br />
cost of constructing a special exercise or “lap”<br />
swimming pool to treat severe osteoarthritis, to the<br />
extent the expenditure exceeds any resulting<br />
increase in the value of taxpayer’s related property,<br />
is deductible as a medical expense. Rev. Ruls.<br />
54-57 and 59-411 modified. §1.213-1. (Sec. 213,<br />
’86 Code.)<br />
Rev. Rul. 83-33, 1983-1 C.B. 70.<br />
66.181 Swimming pool or elevator; medical<br />
purposes. The cost of constructing a swimming<br />
pool or installing an elevator on a taxpayer’s property<br />
constitutes an expenditure for permanent<br />
improvements which increase the value of the<br />
property and does not qualify as a deductible medical<br />
expense, even though such expenditure was<br />
made pursuant to the recommendation of a physician<br />
for health reasons. Modified by Rev. Rul.<br />
83-33. §§39.23(x)-1, 39.24(a)-2. (Secs. 23(x),<br />
24(a), ’39 Code; Secs. 213, 263, ’86 Code.)<br />
Rev. Rul. 54-57, 1954-1 C.B. 67.<br />
66.182 Television license. If a radio station is<br />
successful in securing from the Federal Communications<br />
Commission a particular television<br />
channel, the <strong>expenditures</strong> involved must be<br />
capitalized; if not successful they are deductible as<br />
a loss in the year permission to use the television<br />
channel is denied. However, since the useful life<br />
of the license is indefinite, a depreciation deduction<br />
is not allowable. §1.167(a)–3. (Secs. 165,<br />
167, 263; ’86 Code.)<br />
Rev. Rul. 56-520, 1956-2 C.B. 170.<br />
66.183 Television license; acquisition cost.<br />
Expenditures incurred in acquiring a television<br />
license and construction permit are capital <strong>expenditures</strong><br />
and constitute a part of the cost basis of an<br />
asset of a permanent nature. Deductions for<br />
depreciation over the period of construction and<br />
the first three-year period of the license are not<br />
allowable for income tax purposes since the useful<br />
life of a television license is of an indeterminate<br />
duration. WDEF Broadcasting Co. decision will<br />
not be followed. §§39.23(1)–3, 1.167(a)–3. (Sec.<br />
23(1), ’39 Code; Sec. 167, ’86 Code.)<br />
Rev. Rul. 64-124, 1964-1 (Part 1) C.B. 105.<br />
66.184 Textbooks and visual aids; development<br />
and publication costs. Costs incurred by an<br />
accrual basis taxpayer in writing, editing, design<br />
and art work directly attributable to the development<br />
of textbooks and visual aids are capital<br />
<strong>expenditures</strong>. Costs incurred in the printing and<br />
publishing of such material should be inventoried<br />
with aliquot apportionment to the books and visual<br />
aids on hand at the end of the taxable year. Expenditures<br />
for manuscripts or visual aids that are<br />
abandoned may be deductible as losses under section<br />
165. The Service will not follow the decision<br />
in Stern holding that a taxpayer, in the business of<br />
writing books, may deduct traveling expenses<br />
incurred while researching, writing, and arranging<br />
material for a book. Note: See Sec. 2119 of Pub. L.<br />
94-455, 1976-3 C.B. (Vol. 1) 388. §§1.165-1,<br />
1.167(a)-1, 1.174-2, 1.263(a)-2, 1.471–1. (Secs.<br />
165, 167, 174, 263, 471; ’86 Code.)<br />
Rev. Rul. 73-395, 1973-2 C.B. 87.<br />
66.185 Timber cutting rights; assigned to<br />
limited partnership. A timber company assigned<br />
its right to cut timber on U.S. Forest Service land<br />
to a promoter who sold the rights to a limited part-
<strong>Capital</strong> <strong>expenditures</strong><br />
nership. Under the terms of the installment contract<br />
the total “interest” and principal payments<br />
the partnership will pay the promoter equal the<br />
promoter’s obligation to the timber company plus<br />
an override. The amounts designated as “interest”<br />
are part of the sales price. §§1.163–1, 1.263(a)–1.<br />
(Secs. 163, 263; ’86 Code.)<br />
Rev. Rul. 82–78, 1982–1 C.B. 30.<br />
66.186 Title index files. Amounts paid by a real<br />
estate title insurance company for a block of title<br />
files are nondeductible capital <strong>expenditures</strong> even<br />
though one-half of the files were duplicates of its<br />
own files. O.D. 1049 superseded. §1.263(a)–1.<br />
(Sec. 263, ’86 Code.)<br />
Rev. Rul. 70–26, 1970–1 C.B. 55.<br />
66.187 Trade catalog publication. Costs<br />
incurred in publishing a trade catalog with a useful<br />
life exceeding one year are not deductible business<br />
expenses but must be capitalized and depreciated<br />
over the useful life of the catalog. §§1.162–1,<br />
1.461-1. (Secs. 162, 461; ’86 Code.)<br />
Rev. Rul. 68-360, 1968-2 C.B. 197.<br />
66.188 Trademarks. The amount paid for preparing<br />
and filing an affadavit for the continued use<br />
of a trademark is a capital expenditure and not<br />
deductible. §39.24(a)-2. (Sec. 24(a), ’39 Code;<br />
Sec. 263, ’86 Code.)<br />
Rev. Rul. 55-158, 1955-1 C.B. 319.<br />
66.189 Transportation costs; horses acquired<br />
for breeding. Transportation costs and incidental<br />
charges incurred by a horse breeder in the acquisition<br />
of thoroughbred stud horses are capital <strong>expenditures</strong><br />
to be included in the basis of the horses<br />
acquired and recovered through depreciation. I.T.<br />
2433 superseded. §§1.167(a)-1, 1.263(a)-1.<br />
(Secs. 167, 263; ’86 Code.)<br />
Rev. Rul. 72–113, 1972–1 C.B. 99.<br />
66.190 Unamortized bond expense; bond<br />
conversion to stock. Unamortized bond discount<br />
on convertible bonds ceases to be deductible as<br />
interest expense upon conversion of the bonds into<br />
stock. Any other unamortized bond expense<br />
assumes the character of a capital expenditure in<br />
connection with the stock. I.T. 2347 and G.C.M.<br />
9674 superseded. §§1.163-3, 1.263(a)-1,<br />
1.1232-1. (Secs. 163, 263, 1232; ’86 Code.)<br />
Rev. Rul. 72-348, 1972-2 C.B. 97.<br />
66.191 Underwriter’s fee; stock and bond<br />
exchange. The issuance by a corporation of<br />
debentures and common stock in exchange for its<br />
outstanding preferred stock, the aggregate fair<br />
market value of the former being greater than the<br />
fair market value of the latter, does not give rise to<br />
bond discount. Payments of fees to underwriters in<br />
effecting the exchange constitute capital <strong>expenditures</strong>,<br />
with the portion attributable to the debentures<br />
being amortizable proportionately over their<br />
term. §§1.162–1, 1.263(a)-1. (Secs. 162, 263; ’86<br />
Code.)<br />
Rev. Rul 59-387, 1959-2 C.B. 56.<br />
66.192 Uniform capitalization rules; creative<br />
property; safe harbor. Guidance is provided to<br />
certain authors, photographers, artists, and other<br />
similarly situated persons regarding the uniform<br />
capitalization rules under section 263A of the<br />
Code.<br />
Notice 88-62, 1988-1 C.B. 548.<br />
66.193 Unproductive and real property;<br />
advertising; maintenance and upkeep. A dvertising<br />
expense on unproductive property, and<br />
maintenance and upkeep costs attributable to<br />
improved and unimproved unproductive real<br />
property are not carrying charges chargeable to<br />
capital account. I.T. 2284 and I.T. 2701 superseded.<br />
§§1.266-1, 1.1016–2. (Secs. 266, 1016;<br />
’86 Code.)<br />
Rev. Rul. 71–475, 1971–2 C.B. 304.<br />
66.194 Vacation pay; employment on<br />
construction projects. Any amount of vacation<br />
pay for taxpayer’s employees that is attributable to<br />
employment on construction projects in its expansion<br />
program is not a deductible business expense;<br />
such vacation pay represents a capital expenditure,<br />
includible as part of the cost of the construction<br />
project. §§1.162–10, 1.263(a)–1. (Secs. 162,<br />
263; ’86 Code.)<br />
Rev. Rul 67-75, 1967-1 C.B. 41.<br />
66.195 Water well or test hole; abandonment.<br />
Amounts expended for drilling or deepening a<br />
water well to be used for irrigation and other agricultural<br />
purposes by a taxpayer engaged in the<br />
business of farming are capital <strong>expenditures</strong>. (Rev.<br />
Rul. 55–367). Any loss incurred on the abandonment<br />
of a well for bona fide business reasons is a<br />
deductible business loss in the taxable year such<br />
action is taken. (Rev. Rul. 56–599). Amplified to<br />
provide that amounts for drilling a test hole to<br />
ascertain the existence of water are capital <strong>expenditures</strong><br />
if a sufficient supply of water is found and<br />
the well is developed; however, where the water<br />
supply is insufficient and the test hole is abandoned,<br />
the drilling <strong>expenditures</strong> are deductible<br />
losses. (Rev. Rul. 61-206). §§1.165-2,<br />
1.167(a)-8, 1.263(a)-1. (Secs. 165, 167, 263; ’86<br />
Code.)<br />
Rev. Rul. 55-367, 1955–1 C.B. 25; Rev. Rul.<br />
56-599, 1956-2 C.B. 122; Rev. Ru1. 61-206,<br />
1961-2 C.B. 57.