Rev. Rul. 69-119

The purpose of this Revenue Ruling is to update and restate, under current statute and regulations, the position set forth in G.C.M. 16279, C.B. XV-1, 122 (1936).

The question is whether certain expenditures made for repair of railroad cars in a given taxable year may, for Federal income tax purposes, be amortized over the taxable year in which the cars were repaired and the three succeeding taxable years.

A taxpayer repairs on an average x cars each year, the expense of which is charged to current maintenance cost. During a particular taxable year, its directors authorized expenditures to cover repairs of 4x cars in the event proper authority could be obtained from the Interstate Commerce Commission to make an accounting consistent with the company's best interests. The taxpayer accordingly made application to the Commission to amortize the contemplated repair expenditures over a 4-year period and received the necessary authorization. The taxpayer began and completed the contemplated repair program during the year. The repairs were of the type made to keep the cars in an ordinary efficient operating condition. They neither added materially to the value of the cars nor appreciably prolonged their useful lives. However, because the amount of the expenditures for that year was approximately equivalent to the amount of such expenditures normally made over a four-year period, for Federal income tax purposes, the taxpayer has asked whether it may deduct, as expenses for that year, only one-fourth of the total cost of repairing the 4x cars with the intention of deducting as expenses the remaining three-fourths in equal amounts in its returns for the three next succeeding taxable years.

Section 162 of the Internal Revenue Code of 1954 provides that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in a carrying on any trade or business.

Section 461 of the Code provides, in part, that the amount of any deduction or credit shall be taken for the taxable year under the method of accounting used in computing taxable income.

Section 1.162-4 of the regulations provides, in part, that the cost of incidental repairs that neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinary efficient operating condition, may be deducted as an expense.

Section 1.461-1(a)(3)(i) of the regulations provides, among other things, that each year's return should be complete in itself, and taxpayers should ascertain the facts necessary to make a correct return. The expenses, liabilities, or loss of one year cannot be used to reduce the income of a subsequent year.

Even though the taxpayer's expenditures for the taxable year were approximately four times greater than normal, to repair four times as many railroad cars as normal, nevertheless, the repairs were incidental repairs within the meaning of section 1.162-4 of the regulations since they neither added materially to the value of the cars nor appreciably prolonged their useful lives, but were made to keep the cars in an ordinary efficient operating condition.

Accordingly, for Federal income tax purposes, the taxpayer's expenditures to repair the 4x cars in this case are not amortizable over a four-year period, but are deductible under section 162 of the Code for the taxable year in which the expenditures were paid or incurred.

G.C.M. 16279 is superseded, since the position set forth therein is restated under current law and regulations in this Revenue Ruling.

Compare Revenue Ruling 69-116, page 85, this Bulletin, which holds that certain expenditures paid or incurred to extend or prolong the useful life of freight-train cars must be capitalized or charged to the depreciation reserve account for such cars.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.