Content area
Full Text
INTRODUCTION
Section 263(1) and the regulations under secsec263 and 162 set forth the traditional general rules used in determining whether amounts expended for work on buildings and other tangible property constitute deductible repairs or capitalizeable improvements. Section 263(a)(1) provides that no current deduction is allowed for an amount paid for permanent improvements or betterments made to increase the value of any property. Under Regs. sec1.263(a)-1 (b), a capital expenditure includes any expenditure that adds value to or substantially prolongs the useful life of an item or that adapts the item to a new or different use. Assuming the capitalized improvement or betterment has a determinable useful life, its cost may be recovered over a period of years through the allowance for depreciation provided by secsec167 and 168. On the other hand, Regs. sec1.162-4 permits the current deduction of repairs; that is, expenditures that do not add value or substantially prolong the useful life of property.
Despite the apparent simplicity of the foregoing rules, their application to particular situations often proves difficult. As stated by the Board of Tax Appeals (now the Tax Court) as far back as 1929, "the line between repairs and maintenance, and betterments and improvements is shadowy and indistinct."
A recent technical advice memorandum, TAM 9240004, illustrates the difficulties that arise in determining whether expenditures are currently deductible or capitalizeable. In the technical advice memorandum, the National Office addressed the issue of whether the cost of an asbestos removal program undertaken with respect to paper and pulp making machinery was a capitalizeable betterment or a deductible repair. Perhaps not surprisingly, given its longstanding rigid views on the capitalization versus repair issue, the National Office advised that the asbestos removal costs must be capitalized.
This memorandum will review TAM 9240004, the basis for the taxpayer's repair position, and the rationale used by the National Office for its capitalization holding. The National Office's rationale relies not only on traditional repair versus capitalization principles but also on the uniform capitalization rules of sec263A, enacted in 1986, and on the Supreme Court's recent opinion in INDOPCO, Inc. v. Comr.(3) It will be seen that while the ational Office's position finds some support in case law relating to regulatory compliance, the weight of judicial authority favors...