Rev. Rul. 69-62

Advice has been requested concerning the treatment, for Federal income tax purposes, of costs incurred by a railroad company to remove certain railroad trackage under the circumstances described below.

The railroad company purchased certain land on which a railroad yard was located. It purchased the property with the intention of leasing a portion of the land for commercial purposes to persons who use the railroad. The purchase price of the property was 100x dollars. The railroad yard acquired contained 115x feet of trackage and 10 turnouts. In order to make the land available for leasing, the company removed 100x feet of the trackage including seven turnouts. The salvage proceeds from the material recovered exceeded the costs for removal. The land made available by removal of the trackage was leased to other persons for commercial and light industry uses.

Section 165(a) of the Internal Revenue Code of 1954 provides the general rule that losses sustained during the taxable year and not compensated for by insurance or otherwise shall be allowed.

Section 1.165-3 of the Income Tax Regulations provides, in part:

"* * * the following rule shall apply when in the course of a trade or business * * *, real property is purchased with the intention of demolishing either immediately or subsequently the buildings situated thereon: No deduction shall be allowed under section 165(a) on account of the demolition of the old buildings * * *. The entire basis of the property so purchased shall, * * * be allocated to the land only. Such basis shall be increased by the net cost of demolition or decreased by the net proceeds from demolition."

Although section 1.165-3 of the regulations refers to the demolition of buildings, the principle stated therein is equally applicable to the demolition of other land improvements.

Accordingly, in the instant case, the removal costs of the railroad trackage are not allowable deductions. Instead, such costs must be taken into account in determining the basis of the land. Consequently, the transaction in the instant case should for Federal income tax purposes be treated in the manner described below. First, the purchase price of the property (100x dollars) must be equitably allocated to the basis of the land and to the 15x feet of trackage, including the three turnouts that remain in place. Next, the purchase price allocated to the basis of the land should be reduced by the amount by which the proceeds from salvage exceeded the cost of the removal of the recovered material.