Rev. Rul. 68-483

Advice has been requested whether the initial cost of dredging a slip on land owned by a taxpayer during its construction of a pier facility, and the subsequent redredging costs necessitated by silting, represent depreciable assets.

The taxpayer incurred an initial cost of dredging a slip during its construction of a pier facility for use in its business of building, converting, and repairing ocean going ships. The slip for the pier was dredged to an 18 foot depth at the inshore line, and a 30 foot depth at the channel line. The taxpayer owns the land underlying the pier facility, including the dredged slip, in fee. Due to continuing accumulations of silt in the river, the slip is redredged every three years to preserve the initially dredged area.

Section 167 of the provides as follows:

(a) General Rule .-There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)

(1) of property used in the trade or business, or

(a) of property held for the production of income.

Section 1.167(a)-2 of the Income Tax Regulations provides, in pertinent part, that the depreciation allowance does not apply to land apart from the improvements or physical development added to it. When an expenditure relates to an improvement or physical development added to the land, it may be subject to a depreciation allowance if the property meets all the requirements necessary for application of the depreciation deduction.

Section 1.167(a)-3 of the regulations provides, in pertinent part, the following rule for intangible assets used in the trade or business or in the production of income:

If an intangible asset is known from experience or other factors to be of use in the business or in the production of income for only a limited period, the length of which can be estimated with reasonable accuracy such an intangible asset may be the subject of a depreciation allowance. * * *

The dredging or deepening of a river channel is an alteration of the land underlying the river, and, because of the nature of this land alteration, the cost of the dredging is an intangible asset whether the taxpayer owns the land in fee or has lesser rights in and to the land. The mere fact that a dredged river channel is associated with a depreciable pier does not establish a useful life for the dredging since the dredging costs are normally independent of the pier and will not ordinarily be reincurred with each replacement or reconstruction of the pier itself. See Revenue Ruling 66-71, C.B. 1966-1, 44, and Revenue Ruling 68-280, C.B. 1968-1, 20.

Whether or not an intangible asset, or a tangible asset, is depreciable for Federal income tax purposes depends upon the determination that the asset is actually exhausting, and that such exhaustion is susceptible of measurement. General Equipment Co. v. Commissioner 2 B.T.A. 804 (1925).

Dredging improvements generally have an indefinite period of usefulness. However, in those instances where particular conditions exist, such as silting, there may be, based on the particular facts and circumstances, grounds for depreciating dredging costs. Commodore's Point Terminal v. Commissioner 18 B.T.A. 385 (1929), acquiescence, C.B. IX-2, 13 (1929).

In this case, since the taxpayer maintains a continuing program for the periodic redredging of the slip, the initial dredged area undergoes no actual exhaustion, and is, in fact, indefinitely preserved by the redredging.

The periodic redredgings, however, as evidenced by the necessity for redredging every three years, represent land improvements that are exhausting. The period of the usefulness of the redredgings is susceptible of measurement, and is determinable by the frequency of the need to redredge. The redredging costs, therefore, represent depreciable intangible assets since the period of their usefulness extends beyond a one year period.

Accordingly, under the circumstances of this case, the costs of initially dredging the slip on the taxpayer's land represents nondepreciable intangible assets. The costs of redredging, however, represent depreciable intangible assets with useful lives measurable by the frequency of the need to redredge since the period of the usefulness of the redredgings exceeds a period of one year.