Rev. Rul. 70-135

In 1968 X corporation purchased from R, an unrelated railroad corporation, at a cost of 2,000x dollars, used freight cars that R had used in its operations since 1953. X also entered into a bona fide lease with R under which the freight cars, after they had been reconstructed, would be leased to R for 15 years for a fair rental.

X had the freight cars completely reconstructed during 1968 at a cost of 7,000x dollars. The reconstruction of the freight cars resulted in a 15-year extension of their original useful life. X did not elect to treat R as the owner of the freight cars for the purpose of the investment credit allowed under section 38 of the Internal Revenue Code of 1954. Held, only the amount of the reconstruction cost (7,000x dollars) qualifies as an investment in "new section 38 property" under section 48(b) of the Code and section 1.48-2(b)(2) of the Income Tax Regulations, for the purposes of the investment credit allowed under section 38 of the Code. Held further, the amount paid for the freight cars (2,000x dollars) does not qualify as an investment in "used section 38 property" because, after their acquisition by X, they are used by R, "the person who used such property" before the acquisition within the meaning of section 48(c) of the Code and section 1.48-3(a)(2) of the regulations. Accordingly, the acquisition cost of 2,000x dollars does not qualify for the investment credit allowed under section 38 of the Code.