Rev. Rul. 69-201

Advice has been requested whether certain parts, referred to as "standby replacement parts," used by a taxpayer in its business of pit mining are items for which depreciation is allowable under the provisions of section 167 of the Internal Revenue Code of 1954, at the time such parts are purchased and held on a standby basis as major replacement parts for certain of its machinery and equipment.

The taxpayer is engaged in the business of mining ore in which it uses certain major items of machinery and equipment, including haulage trucks, conveyors, converters, drills, power shovels, crushers, and skip haulage systems, each of which has a useful life to the taxpayer of eight years or more. To avoid prolonged and costly delays in operations from breakdowns of its major machinery and equipment the taxpayer regularly purchases standby replacement parts. The standby replacement parts are difficult to obtain quickly on short notice. A main driving gear to a power shovel, and a suspension (similar to shock absorber) on a 65-ton hauling truck, are examples of taxpayer's standby replacement parts. All of the taxpayer's standby replacement parts have a useful life to the taxpayer well in excess of one year.

When the used standby replacement parts are removed from the machinery and equipment, they are repaired and again placed on standby for reuse. Generally, the parts are repaired and reused three or four times after their original use in replacing a like part in the machinery and equipment. These parts are usually purchased when the machinery and equipment are acquired. They are intended for use on the respective item of machinery or equipment so acquired and are not, by their nature, generally interchangeable with parts for other types of machinery and equipment. The parts are physically located (usually in a warehouse) near the machinery and equipment they are to serve.

Section 167(a) of the Code provides generally that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear, and tear (including a reasonable allowance for obsolescence) of property used in a trade or business, or of property held for the production of income.

Section 1.167(a)-1(a) of the Income Tax Regulations provides, in part, that a reasonable allowance for depreciation is that amount which should be set aside for the taxable year in accordance with a reasonably consistent plan (not necessarily at a uniform rate) so that the aggregate of the amounts set aside, plus the salvage value, will, at the end of the estimated useful life of the depreciable property, equal the cost or other basis of the property. However, see section 167(f) of the Code for rules that permit a reduction in the amount of salvage value to be taken into account for certain personal property acquired after October 16, 1962.

Section 1.167(a)-1(b) of the regulations states, in part, that the estimated useful life of an asset is not necessarily the useful life inherent in the asset but is the period over which the asset may reasonably be expected to be useful to the taxpayer in his trade or business or in the production of his income.

Section 1.167(a)-2 of the regulations provides that the depreciation allowance in the case of tangible property applies only to that part of the property which is subject to wear and tear, to decay or decline from natural causes, to exhaustion, and to obsolescence.

Section 1.167(a)-10(b) of the regulations provides that the period for depreciation of an asset shall begin when the asset is placed in service and shall end when the asset is retired from service.

Section 1.611-5(a) of the regulations provides in general that the deduction allowed under section 611 of the Code for depreciation of improvements, in the case of mines, oil and gas wells, other natural deposits, and timber, shall be determined under the provisions of section 167 of the Code and the regulations thereunder.

The taxpayer's standby replacement parts are tangible property directly related to the operation of the machinery and equipment which they serve. Even though such parts may not be immediately installed in the machinery and equipment, they are, when purchased for standby use in such machinery and equipment, necessary and essential to the operation of the taxpayer's business. These parts are of the type that are reserviceable and reusable after their initial installation on the machinery and equipment they serve.

Therefore, it is held that the described standby replacement parts, which were purchased at the time the machinery and equipment to which they relate was purchased, are items for which depreciation is allowable under section 167 of the Code, beginning at the time the machinery and equipment to which they relate were placed in service, and will usually have the same useful life as such machinery and equipment.