Rev. Rul. 69-200

Advice has been requested by an airline company regarding the proper Federal income tax treatment of the costs of its "expendable flight equipment spare parts" and "flight equipment rotable parts and assemblies."

The airline maintains its books and records in accordance with the Uniform System of Accounts of the Civil Aeronautics Board. The airline operates several fleets of aircraft and each fleet is made up of a different type of aircraft.

The expendable spare parts are recorded under the Uniform System of Accounts of the Civil Aeronautics Board in Account 1310, Flight Equipment Expendable Parts, described as:

* * * flight equipment replacement parts of a type which ordinarily would be recurrently expended and replaced rather than repaired and reused. * * *

The repairable and reusable parts are recorded under the Uniform System of Accounts of the Civil Aeronautics Board in Account 1608, Flight Equipment Rotable Parts and Assemblies, described as:

(a) * * * all parts and assemblies of material value which are rotable in nature, are generally reserviced or repaired, are used repeatedly and possess a service life approximating that of the property type to which they relate. * * *

(b) This account shall be subdivided as follows by Group II and Group III air carriers:

1608.1 Airframe Parts and Assemblies.

1608.5 Aircraft Engine Parts and Assemblies.

1608.9 Other Parts and Assemblies.

The airline, a Group II air carrier, purchases and maintains in stock for repairs to its aircraft a great number of different expendable flight equipment spare parts, based in part on the manufacturer's recommendations and in part on the airline's experience. Such spare parts are carried in stock by the airline for so long as any of the aircraft that may use these spare parts is flown by the airline. Some of the reasons for maintaining a stock of such parts include meeting the Federal Aviation Agency maintenance requirements, and assurance that there will be no operational delays because of lack of any parts. The expendable flight equipment spare parts involved are of a type normally not repaired and reused. As such parts are taken from stock and used to repair aircraft, the stock supply is replenished by purchasing new parts.

The expendable flight equipment spare parts are carried on hand by the airline until they are installed in the particular type of aircraft for which purchased. After these parts have once been installed they are ordinarily not repairable or reusable.

At the same time the airline acquires a new type of aircraft, it acquires a substantial number of flight equipment rotable parts and assemblies specifically for use on such aircraft. Even though these parts may not be immediately installed, they are, when purchased, necessary and essential to the profitable operation of the airline. These parts include all parts and assemblies that are rotable in nature, are generally reserviced or repaired, and used repeatedly. They possess a service life approximately equal to that of the aircraft for which they are acquired. When the type of aircraft for which these parts and assemblies are acquired is disposed of, these parts and assemblies are also disposed of.

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

Section 1.162-3 of the Income Tax Regulations provides, in part, that taxpayers carrying materials and supplies on hand should include in expenses the charges for materials and supplies only in the amount that they are actually consumed and used in operation during the taxable year for which the return is made.

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 the property used in a trade or business, or of property held for the production of income.

Section 1.167(a)-1(a) of the 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 which 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 this 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.

It is held that the airline's expendable flight equipment spare parts, in the instant case, are materials and supplies within the meaning of section 1.162-3 of the regulations, the cost of which is deductible as an expense under section 162 of the Code for the taxable year in which the spare parts are used to repair aircraft. The cost of such parts on hand at the end of the taxable year is not deductible, but is a deferred expense to be accounted for under the provisions of section 1.162-3 of the regulations.

It is further held that this airline's flight equipment rotable parts and assemblies, which were purchased at the time the airplanes were purchased, are tangible property for which depreciation is allowable under section 167 of the Code, beginning at the time the aircraft for which they were purchased are placed in service and will usually have the same useful life as such aircraft.