Capital expenditures - Uncle Fed's Tax*Board

interest may deduct all the intangible drilling and
development costs provided he makes a proper
election. At the end of the complete payout period
he must capitalize 50 percent of the remaining
undepreciated basis of lease and well equipment,
if any, as the depletable leasehold acquisition costs
of the operating interest acquired. §1.612–4. (Sec.
612, ’86 Code.)
Rev. Rul. 71-207, 1971-1 C.B. 160.
66.85 Intangible drilling and development
costs; operating interest; capital or expense. A
carrying party who drills and completes an oil and
gas well in return for the entire working interest in
the lease until 200 percent of the drilling and
development plus the equipment and operating
costs necessary to produce that amount are
recouped, and after such recoupment relinquishes
all rights in the interest to the lessee, is the owner
of all the working interest during the complete
pay-out period and may exercise the option to
deduct all intangible drilling and development
costs. §§1.263(c)-1, 1.612–4. (Secs. 263, 612; ’86
Code.)
Rev. Rul. 75-446, 1975-2 C.B. 95.
66.86 Intangible drilling and development
costs; operating interest; investment allocation.
A taxpayer’s investment in an oil and gas
venture under a contract designating a dollar
amount as intangible drilling and development
costs is deductible pursuant to an election under
section 263(c) only to the extent that such costs
would have been incurred in an arms-length transaction
with an unrelated drilling contractor. The
remainder of the total investment is the basis of the
taxpayer’s working interest. §§1.263(c)–1,
1.612-4. (Secs. 263, 612; ’86 Code.)
Rev. Rul. 73–211, 1973–1 C.B. 303.
66.87 Intangible drilling and development
costs; properties outside U.S. A domestic corporation
that, under its agreement with a foreign
country, furnishes all the funds for exploration,
development, and production of gas and oil within
designated areas of the country, is required to sell
all of its production to that country at the competitive
world market price, and, except for a provision
for a cash settlement if the foreign country terminates
the agreement, must recover its
investment solely from production, is entitled to a
depletion allowance and may exercise the option
to capitalize or deduct its intangible drilling and
development costs. §§1.263(c)-1, 1.612-4. (Secs.
263, 612; ’86 Code)
Rev. Rul. 73-470, 1973-2 C.B. 88.
66.88 Intangible drilling and development
costs; properties outside U.S. A taxpayer who
holds the working or operating interest in oil and
gas properties located outside the U.S. has the
option to capitalize or expense the intangible drilling
and development costs incurred with respect
to those properties if he is required to report the
income therefrom. §§1.263(c)–1, 1.612-4. (Secs.
263, 612; ’86 Code.)
Rev. Rul. 67-34, 1967-1 C.B. 72.
66.89 Intangible drilling and development
costs; recoupment; partly owned interests.
Intangible drilling and development costs
incurred by a taxpayer in drilling an oil and gas
well under an agreement with the owner of oil and
gas rights in a lease to receive an undivided part
interest therein after completion of the well and to
receive the entire operating interest income until
recoupment (pay-out) of all such expenditures, are
fully allowable as a deduction provided the proper
election is made under reg. 1.612-4. No portion of
such costs is required to be capitalized as deplet
able leasehold acquisition costs. However, at payout,
a portion of the undepreciated basis in the tangible
equipment must be capitalized as deplet able
leasehold acquisition costs. §§1.263(c)-1,
1.612-4. (Secs. 263, 612; ’86 Code.)
Rev. Rul. 69–332, 1969–1 C.B. 87.
66.90 Intangible drilling and development
costs; “turnkey” agreements. An individual
who acquired an interest in an oil and gas lease
from the original lessee well driller, under an
agreement that required no payment for dry holes
but payment of a specified amount to the driller at
the completion of each of a stated number of wells
that were completed as producers, has made capital
expenditures that are not intangible drilling and
development costs. §§1.263(c)–1, 1.612–4. (Secs.
263, 612; ’86 Code.)
Rev. Rul. 75-304, 1975-2 C.B. 94.
66.91 Intangible drilling and development
costs; water injection wells. Certain casts
incurred by a taxpayer in the drilling of water
injection wells necessary in the primary development
of the oil property are “intangible drilling
and development costs” and may, at the tax payer’s
option, be chargeable to capital or to expense.
§§1.263(c)-1, 1.612-4. (Secs. 263, 612; ’86
Code.)
Rev. Rul. 69-583, 1969-2 C.B. 41.
66.92 Interest equalization tax; imposed retroactively.
The interest equalization tax retroactively
imposed on the acquisition of foreign stock
and paid in a subsequent year is required to be
capitalized and treated as part of the cost of the
stock. (Secs. 263, 4911; ’86 Code.)
Rev. Rul. 68-628, 1968-2 C.B. 117.
66.93 Interest equalization tax; insurance
companies. Interest equalization taxes paid by life
and mutual insurance companies upon the acquisition
of notes purchased at par from a foreign corporation
qualify as amortizable bond premium.
Interest equalization taxes that are reimbursed by
the borrower are deductible as business expenses
to the extent the reimbursements are included in
gross income. This deduction must, however, be
reduced by the amount of the adjustment for interest
equalization tax that qualified as amortizable
bond premium. §§1.171-1, 1.263(a)-1, 1.818-3,
1.818-7, 1.822-8, 1.822-10. (Secs. 171, 263, 818,
822; ’86 Code.)
Rev. Rul. 68-85, 1968-1 C.B. 97.
66.94 Investment property; interest and real
property taxes. Accounting fees and general
office costs incurred by a corporation whose sole
activity is an investment in unimproved, non-income-producing
real property are deductible
under Section 162; interest and real property taxes
incurred by the corporation may be deducted
under section 163 and 164, respectively.
§§1.162-1, 1.163-1, 1.164-1, 1.266-1. (Secs.
162, 163, 164, 266; ’86 Code.)
Rev. Rul. 78-195, 1978-1 C.B. 39.
66.95 Land clearing expenditures; arid land
converted into farm land. A taxpayer in the business
of farming who with others undertook, under
the Desert Land Act, the conversion of arid public
land into land suitable for farming may deduct,
under section 182(a), his pro rata share of costs for
land levelling and clearing and for nondepreciable
canal construction. However, the irrigation system
with a pumping plant, penstocks, depreciable
canals, steel mainlines, and portable sprinkler
Iincs arc tangible assets subject to section 167, and
expenditures incurred in perfecting land title are
includable in the cost basis of the land.
§§1.167(a)-2, 1.182-3, 1.263(a)-1. (Secs. 167,
182, 263; ’86 Code.)
Rev. Rul. 75-151, 1975-1 C.B. 88.
66.96 Land improvement and construction;
loan interest. A taxpayer who borrowed funds for
land improvement and plant construction may
elect to capitalize the loan interest for the current
and subsequent taxable years even though he
Capital expenditures
deducted such interest for the prior year,
§1.266-1, (Sec. 266, ’86 Code.)
Rev. Rul. 72-594, 1972-2 C.B. 199.
66.97 Land preparation costs; electric and
gas distribution systems. Amounts paid by the
developer of a mobile home park to a public utility
for underground electric and gas distribution systems
are capital expenditures that are included in
the developer’s cost basis of the land. Examples
illustrate which land preparation costs may be
depreciated by the developer and which must be
included in the basis of the land. §§1.167(a)–2,
1.263(a)-1. (Secs. 167, 263; ’86 Code.)
Rev. Rul. 80-93, 1980-1 C.B. 50.
66.98 Landfill; revetments and berm. The
costs incurred in construction of steel cellular
revetments and a stable slope berm outward from
a lake shoreline, as part of a project to enclose and
fill in an area of the lake to provide additional land
for industrial facilities, and the costs of filling in
the inclosed area are nondepreciable land acquisition
costs. §§1.167(a)–2, 1.263(a)–1. (Secs. 167,
263; ’86 Code.)
Rev. Rul. 77-270, 1977-2 C.B. 79.
66.99 Lease; cancellation payment. An
amount paid by the lessor to cancel a warehouse
lease to secure the warehouse for his own use is a
capital expenditure amortizable over the lease’s
unexpired term. The lessor’s subsequent lease of
the warehouse to another lessee does not affect the
period over which the cancellation payment is
amortized. O.D. 397 superseded. §1.263(a)–1.
(Sec. 263, ’86 Code.)
Rev. Rul. 71-283, 1971-2 C.B. 168.
66.100 Lease; modification; additional
“rental” payments. Additional “rental” payments
made over a part of the lease term, in accordance
with a lease modification agreement, are
capital expenditures amortizable over the full term
of the lease. §§1.162–1, 1.263(a)–1. (Secs. 162,
263; ’86 Code.)
Rev. Rul. 73-176, 1973-1 C.B. 146.
66.101 Leases; automotive equipment. Taxpayer
leased automotive equipment from a bank
under a trust agreement providing for rental payments
equal to the costs incurred by the bank in
acquiring titled, interest and incidental expenses.
The bank held only bare legal title and the taxpayer
was virtual owner of the vehicles and
entitled to depreciate the cost, which included the
rental pay ments, over the life of the equipment,
rather than over the “lease” period. The “rental”
payments constituted part payments for capital
items and should be capitalized insofar as they
represent capital payments. §§39.23(a)-10,
39.23(1)-1, 39.24(a)-2. (Secs. 23(a), 23(1), 24(a),
’39 Code; Secs. 162, 167, 263, ’86 Code.)
Rev. Rul. 55-25, 1955-1 C.B. 283.
66.102 Leases; oil and gas; acquisition fees. A
taxpayer must capitalize as leasehold acquisition
costs both money paid to a filing service company
to file applications to lease Federal lands under
noncompetitive simultaneous offer procedure and
an additional amount paid for an option to sell an
interest in any leases acquired with a concurrent
guarantee by the company that if no leases are so
acquired it will assign a lease and buy it back. If a
lease is assigned and repurchased by the filing service
company, the taxpayer’s loss, subject to treatment
under section 1231(a), is the difference
between the total amount paid to the company and
the amount received on the repurchase. Modified
by Rev. Rul. 80-176. §1.263(a)-1. (Sec. 263, ’86
Code.)
Rev. Rul. 77-395, 1977-2 C.B. 80.
66.103 Leases; oil and gas; acquisition fees.
Fees paid for services rendered in connection with
the acquisition of noncompetitive government oil
and gas leases must be capitalized by the applicant
as part of the cost of acquisition of the leases