Rev. Rul. 69-606

Advice has been requested whether, under the circumstances described below, depreciation is allowable on certain earthen tanks (sometimes called "ponds") on land purchased by a taxpayer.

The taxpayer is engaged in the leasing of land to ranchers for a fixed fee (not based on production) for raising livestock. The taxpayer does not participate in the management of the land or the raising of the livestock. For use in its leasing business, the taxpayer purchased three large parcels of land, formerly ranches, upon which there were several earthen tanks or ponds used for watering livestock.

At the time of purchase by the taxpayer, the earthen tanks or ponds had been in use by the former owners or lessees for various periods of time and contained varying amounts of sediment. The earthen tanks or ponds were of various sizes, having water storage capacities of from 5,000 to over 20,000 cubic feet. They were originally constructed by removing earth to form an excavation or pit, some with earthen dams, forming a reservoir to impound and store the surface water for livestock use much like a natural pond.

The taxpayer desires to allocate each ranch's cost between land and improvements, including the earthen tanks or ponds, on the basis of the fair market value of the assets involved, and to depreciate the improvements over the estimated useful life of such improvements.

The taxpayer has not constructed any earthen tanks or ponds itself, nor has it cleaned out any of the existing ones. The taxpayer states that the average earthen tank or pond has a useful life of 20 to 25 years before sedimentation makes it useless. However, the taxpayer also states that the estimated life of each tank or pond will vary greatly due to many factors such as variation in soil, size of watershed, amount of protective vegetable covering, rainfall intensity, slope of terrain, and the quality of work involved in construction of the tank or pond. On smaller tanks or ponds of less than 5,000 cubic yards capacity, it is possible to use dragline equipment to clear sediment from the tank or pond, but on larger tanks or ponds, suitable equipment is not available to clean them out and it is more economical to construct a new tank or pond.

The taxpayer did not furnish any data that would establish any reasonable estimate of the useful lives of the earthen tanks or ponds in the instant case. The tanks or ponds continue in use for indefinite periods.

Section 167 of the Internal Revenue Code of 1954 allows as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) of (1) property used in the trade or business, or (2) property held for the production of income.

Section 1.167(a)-1 of the Income Tax Regulations in defining what constitutes a reasonable allowance for depreciation states that the amounts of depreciation 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.

Section 1.167(a)-2 of the regulations provides in part that the depreciation allowance in the case of tangible property applies only to that part of the property that is subject to wear and tear, to decay or decline from natural causes, to exhaustion, and to obsolescence. The allowance does not apply to land, apart from the improvements or physical development added to it.

Section 1.167(a)-3 of the regulations, relating to depreciation allowances on intangible assets, provides in part that if an intangible asset 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, such intangible asset may be the subject of a depreciation allowance. An intangible asset, the useful life of which is not limited, is not subject to the allowance for depreciation. No allowance will be permitted because, in the unsupported opinion of the taxpayer, the intangible asset has a limited useful life.

Whether an asset is depreciable for Federal income tax purposes depends upon the determination that the asset is actually exhausting, and that such exhaustion is susceptible of measurement. General Equipment Co. v. Commissioner, 2 B.T.A., 804 (1925).

It is held that, on the facts of this case, the taxpayer's earthen tanks or ponds have indeterminable useful lives that are not reasonably susceptible of measurement and are, therefore, not depreciable.

Section 175 of the Code allows a taxpayer engaged in farming to elect to deduct certain expenditures (not deductible or depreciable under any other section of the Code) that are paid or incurred by him during the taxable year for soil and water conservation purposes with respect to land used in farming, such as the movement of earth (including the construction of channels, ditches, earthen dams, water courses, and ponds). This deduction is allowable only to taxpayers engaged in the business of farming. A taxpayer is engaged in the business or farming if he cultivates, operates, or manages a farm for gain or profit, either as owner or tenant.

In the instant case the taxpayer is not engaged in the business of farming within the meaning of section 175 of the Code. Furthermore, the expenditures for the construction of the earthen tanks or ponds were not paid or incurred by the taxpayer during the taxable year. Accordingly, no deduction is available to the taxpayer under that section.