Capital expenditures - Uncle Fed's Tax*Board

Capital expenditures
take a depreciation deduction for the cost of the
trees beginning in the year the trees first reach an
income producing stage and for the cost of the
irrigation system beginning in the year the system
is placed in service. Modified by Rev. Rul. 83–67;
Clarified by Rev. Rul. 83-128. §§1.167(a)-1,
1.263(a)-2, 1.278-1. (Secs. 167, 263, 278; ’86
Code.)
Rev. Rul. 80-25, 1980-1 C.B. 65.
66.24 Citrus trees; income producing state.
Revenue Ruling 65–104, relating to the qualification
of citrus trees as section 38 property for purposes
of the investment credit, is clarified to
remove the implication that all expenditures necessary
to bring orchard trees to an income producing
state must be capitalized. §§1.162–12,
1.175-1, 1.180-1, 1.182-1. (Secs. 162, 175, 180,
182; ’86 Code.)
Rev. Rul. 66-183, 1966-2 C.B. 47.
66.25 Clearing of right-of-way; quarry property.
Costs incurred by a quarry operator to reimburse
a power company for the relocation of
power transmission facilities located on a right-ofway
through the quarry property are additional
capital expenditures made to acquire full rights to
the mineral deposits, recoverable through depletion,
and are not “development expenditures”
subject to section 616 of the Code. §1.616–1. (Sec.
616, ’86 Code.)
Rev. Rul. 66-170, 1966-1 C.B. 159.
66.26 Coal mining; airshaft, compressor and
fan to maintain normal output. Due to a recession
of the working faces of their mine, a coal mining
company made expenditures for an air shaft,
fan, and compressor which the Commissioner
contended were capital improvements with a useful
life of 20 years. Held, the expenditures were
incurred to maintain normal output of the mine
and are allowable business expenses. The Commissioner’s
contention that the expenditures must
be shown to be minor rather than major was without
authority. (Sec. 23(m), ’39 Code; Sec. 611, ’86
Code.)
Roundup Coal Mining Co., 20 T.C. 388, Nonacq.,
1954–1 C.B. 8.
66.27 Coal mining equipment to maintain
normal output of coal. The sole shareholder of a
mining corporation deducted, as a supply expense,
the cost of movable conveyor equipment with an
approximate life expectancy of five years that was
used to maintain the production level of coal but
neither materially increased the mine’s value nor
deceased the cost of production. Held, the expenditures
were not required to be capitalized but
were deductible as ordinary and necessary business
expenses. (Sec. 162, ’86 Code.)
Leland Adkins. 51 T.C. 957, Acq., 1970-1 C.B.
xv.
66.28 Computer software; development
costs. Guidelines are provided for use in connection
with the examination of income tax returns
involving deductions of costs incurred in the
developing, purchasing or leasing of computer
software, effective with respect to taxable years
ending after October 27, 1969; however, the Service
will not disturb taxpayers’ treatment of software
costs for prior taxable years except to the
extent such treatment is markedly inconsistent
with the practices set forth. §§1.162-4, 1.162–11.
(Sec. 162, ’86 Code.)
Rev. Proc. 69-21, 1969–2 C.B. 303.
66.29 Computer software; development
costs; accounting method. The capitalization of
software costs with respect to a new computer
constitutes a change in method of accounting
requiring the Commissioner’s consent, where, in
prior years, with respect to another computer, a
taxpayer has always expensed the software costs
for both book and Federal income tax purposes.
§§1.162-4, 1.446-1. (Secs. 162, 446; ’86 Code.)
Rev. Rul. 71-248, 1971-1 C.B. 55.
66.30 Construction of speculative housing.
The costs (including land) incurred in the
construction of a house for speculative sale should
be capitalized regardless of the taxpayer’s overall
method of accounting, but not taxes and carrying
charges for which an election to capitalize has not
been made under section 266. Such costs shall be
applied against the amount realized upon sale of
the house, for purposes of determining gain or
loss. Administrative and selling expenses may be
deducted in the year incurred or paid if such
method clearly reflects income. §§1.266–1,
1.446-1, 1.461-1. (Secs. 266, 446, 461; ’86
Code.)
Rev. Rul. 66-247, 1966-2 C.B. 198.
66.31 Contribution to state construction of
bridge. A voluntary contribution by a corporation
to defray in part the cost to the state of construction
of a bridge which can be used by the corporation
to transfer stone from its quarry on one side of a
river to its plant on the other side is an exhaustible
capital expenditure depreciable or amortizable
over the estimated useful life of the bridge (period
of economic usefulness to the corporation). (Sec.
263, ’86 Code.)
Rev. Rul. 58-373, 1958-2 C.B. 125.
66.32 Contributions to exempt service organization.
Payments by a group of taxpayers to a
nonprofit exempt organization organized by them
for the purpose of rendering necessary marine
radio telephone service, to the extent used by the
corporation to purchase equipment, constitute a
capital investment subject to depreciation. That
portion of the payments utilized by the corporation
to meet current operating expenses constitutes
payment for services rendered by it to the taxpayers
and is deductible by them as a business
expense. §§1.162–1, 1.263(a)–1. (Secs. 162, 263;
’86 Code.)
Rev. Rul. 58–534, 1958-2 C.B. 125.
66.33 Contributions to hospital association.
Payments by a corporation to a hospital association,
under an agreement which furnished the taxpayer
with particular rights and interests for its
employees for a period often years in certain properties
and facilities of a hospital to be constructed,
are not deductible as charitable contributions or as
business expenses, but constitute capital expenditures.
§§39.23(a)–1, 39.23(a)–1, 39.24(a)–2.
(Secs. 23(a), 23(q), 24(a), ’39 Code; Secs. 162,
170, 263, ’86 Code.)
Rev. Rul. 55-616, 1955-2 C.B. 545.
66.34 Corporate salaries in connection with
corporate mergers and acquisitions. The portion
of the compensation paid by a corporation to
its employees attributable to services performed in
connection with corporate mergers and acquisitions
must be capitalized; however, such amounts
paid with respect to abandoned plans for mergers
or acquisitions are deductible as losses in the year
of abandonment. §§1.165–1, 1.263(a)–1. (Secs.
165, 263; ’86 Code.)
Rev. Rul. 73–580, 1973-2 C.B. 86.
66.35 Costs of completed homes and homes
under construction. Construction costs of completed
homes and costs of construction in progress
are capital expenditures under section 263, and
may not be inventoried under the LIFO inventory
method. Rev. Rul. 69-536 amplified.
§§1.263(a)-1, 1.446-1, 1.472-1. (Secs. 263, 446,
472; 86 Code.)
Rev. Rul. 86-149, 1986-2 C.B. 67.
66.36 Cost of employee benefits; selfconstructed
property. Costs of certain employee
benefits for employees engaged in self-constructing
the employer’s property are nondeductible
capital expenditures under section 263. I.T. 3408
obsoleted. §§1.162–10, 1.263(a)-1, 1.263A-1T,
1.404(a)-1, 1.419-1T. (Secs. 162, 263, 263A,
404, 419; ’86 Code.)
Rev. Rul. 92-31, 1992-1 C.B. 101.
66.37 Cultural practices; farmers. A farmer
who elected to capitalize certain cultural practices
expenditures and who, because of an erroneous
computation, deducted a portion of such expenditures
cannot be required to capitalize the amount
claimed as expenses. (Sec. 162, ’86 Code.)
Richard R. Wilbur, 43 T.C. 322, Acq., 1965-2
C.B. 7.
66.38 Custody and creation fees; sponsored
investment plan. “Custody” fees paid by subscribers
in a sponsored investment plan to the custodian
of the plan for holding the shares of stock
acquired, collecting and reinvesting cash dividends,
etc., are deductible nonbusiness expenses.
However, “creation” fees paid to the sponsor in
developing, selling, and administering the plan in
connection with acquisition of the stock area capital
expenditure which must be added to the cost of
the shares acquired. §§29.23(a)–15, 29.24-2.
(Secs. 23(a), 24, ’39 Code; Secs. 162, 263, ’86
Code.)
Rev. Rul. 3, 1953-1 C.B. 37.
66.39 Depositors’ guaranty fund; equalization
payments. An equalization payment by a
savings and loan association to a depositor’s guaranty
fund as a condition of membership, and representing
in substance an equity in the fund, is a nonamortizable
capital expenditure. Withdrawals
from the fund will be recognized as gain or loss
measured by the difference between the amount of
money received on withdrawal and the adjusted
basis of the equity interest in the fund. §1.162-13.
(Sec. 162, ’86 Code.)
Rev. Rul. 72-379, 1972-2 C.B. 92.
66.40 Development company maintenance
assessments. Maintenance charges assessed
against owners of residential property to provide
municipal services and improvements are includable
in the gross income of the development company
and are not deductible as taxes by the property
owners. No portion of the amount assessed is
a capital expenditure. If an owner converts the
property to rental property, such charges would be
deductible business expenses. §§39.22(a)-1,
39.23(a)-1. (Secs. 22(a), 23(a), ’39 Code; Secs
61, 162, ’86 Code.)
Rev. Rul. 55-154, 1955-1 C.B. 216.
66.41 Dikes, seawalls, etc., to counteract land
subsidence. Amounts expended for construction
of seawalls, dikes, pumping facilities, etc., to
counteract land subsidence arc capital expenditures
and may be recovered through an allowance
for depreciation over the useful life of the facilities,
depending upon construction and the rate of
subsidence to which they are subjected. However,
repairs, maintenance, and moving costs occasioned
by subsidence, are currently deductible
business expenses. §§1.162-1, 1.167(a)-1,
1.263(a)-1. (Sec. 162, 167, 263; ’86 Code.)
Rev. Rul. 60-386, 1960-2 C.B. 107.
66.42 Dredging and excavation costs. Costs of
excavating water canals and dredging channels in
harbors and slips are investments in tangible property
and are depreciable if the asset is actually
exhausting and the exhaustion is susceptible to
measurement. Rev. Ruls. 66-71, 68–280, 68-483,
69-78 modified, and 69–606 clarified.
§1.167(a)-2. (Sec. 167, ’86 Code.)
Rev. Rul. 75–137, 1975–1 C.B. 74.
66.43 Dredging costs; harbor. Dredging costs
incurred to deepen a portion of a harbor alongside
a pier leading to a navigable channel which are for
improvements to land rights are expenditures for