Rev. Rul. 69-78

Advice has been requested whether a taxpayer's costs for the excavation of a cooling water canal may be depreciated under section 167 of the Internal Revenue Code of 1954, under the circumstances described below.

The taxpayer, an electric utility company, initially excavated and subsequently enlarged an open, unlined canal to serve as a conduit for its steam-plant condenser cooling water circulating supply. The canal extends several miles, through land held in fee by the taxpayer, from its steam-electric generating plant site to a point of access with an open, public body of water from which the required supply of cooling water is withdrawn or replenished and to which, after circulation through the steam condensers, the water is returned. Silting is not a problem in these facilities.

The steam-electric plant site so served can be substantially enlarged to a greater potential capability. Upon enlargement of the steam generating plant-through installation of additional or larger generating units, the flow capacity of the existing canal will be increased by additional excavation to accommodate the necessary increased cooling water volumes as may be required from time to time.

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

Section 1.167(a)-3 of the Income Tax Regulations provides that an intangible asset may be the subject of a depreciation deduction allowance if it 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.

The mere fact that the original excavation for a cooling water canal is associated with steam generators that have a determinable useful life does not of itself establish that the canal has a determinable useful life. The excavation costs will not be reincurred every time the generators are retired and replaced. Similarly, any cost for subsequent enlargement of the original canal to provide for increased cooling water volumes necessary for larger or additional generating units, will not be reincurred every time the additional or larger generators are retired and replaced. No other facts are present in this case from which a determinable useful life could be established.

Accordingly, in this case the costs incurred for the initial excavation and for any subsequent enlargement of the water cooling canal or channel are capital expenditures for intangible assets. Furthermore, the useful life of the canal is not reasonably susceptible to measurement and hence the costs are not subject to a depreciation allowance.