Rev. Rul. 67-285

Advice has been requested concerning the qualification of replacements of and additions to railroad track structure as `section 38 property' for investment credit purposes under the `retirement method' of accounting for depreciation. For a description of the retirement method as used by railroads generally see Revenue Ruling 67-22, C.B. 1967-1, 52.

Under this method the deductions allowed provide a substitute for the depreciation deduction for the depreciable portion of the track structure which would be allowable under conventional depreciation methods. See Boston, and Maine R.R. v. Commissioner , 206 F.2d 617.

The deductions attributable to the track structure, under this method, are a substitute for a conventional depreciation allowance on all the working assets. For investment credit purposes it is important to distinguish between replacements and repairs, whether under this method or other methods of accounting for depreciation, since repairs do not qualify for the investment credit, but replacements generally do qualify .

Section 46(a) of the Internal Revenue Code of 1954 provides in pertinent part:

(1) GENERAL RULE.-The amount of the credit allowed by section 38 for the taxable year shall be equal to 7 percent of the qualified investment (as defined in subsection (c)).

Section 46(c)(1) of the Code provides, in effect, that for purposes of computing the amount of credit allowable under section 38 of the Code, the term `qualified investment' means, with respect to any taxable year, the aggregate of the applicable percentage of the basis of each new section 38 property (as defined in section 48(b)) placed in service by the taxpayer during the taxable year, plus the applicable percentage of the costs of each used section 38 property (as defined in section 48(c)(1)) placed in service by the taxpayer during such taxable year.

Section 48(a) of the Code provides, in effect, that section 38 property means certain property with respect to which depreciation or amortization in lieu thereof is allowable.

Section 1.48-1(b) of the Income Tax Regulations provides in pertinent part:

(b) Depreciation allowable.-(1) Property is not section 38 property unless a deduction for depreciation (or amortization in lieu of depreciation) with respect to such property is allowable to the taxpayer for the taxable year. A deduction for depreciation is allowable if the property is of a character subject to the allowance for depreciation under section 167 and the basis (or cost) of the property is recovered through a method of depreciation, including, for example, the unit of production method and the retirement method as well as methods of depreciation which measure the life of the property in terms of years. * * *

In view of the above, the investment credit is applicable to those portions of the depreciable track structure as follows:

New additions to the track structure constructed by the taxpayer after December 31, 1961, qualify as `new section 38 property' for investment credit purposes. Replacements which represent reconstruction likewise qualify. Costs incurred which are in fact for repairs, including the costs of materials used therefor, and removal costs are not qualified investment in section 38 property. Materials used in construction and reconstruction need not be acquired after December 31, 1961, in order for that construction or reconstruction to be entitled to the investment credit.

In view of the foregoing, adequate records must be maintained to distinguish between replacements which represent reconstruction and repairs to support those costs which qualify for the investment credit.

Furthermore, track structure acquired rather than constructed by the taxpayer after December 31, 1961, qualifies as `new section 38 property' provided the original use of such property commences with the taxpayer after such date. If such acquired property fails the original use test, then it is `used section 38 property'. In that event, the property must be acquired by purchase after December 31, 1961, in accordance with sections 179(d)(2)(A) or (B) of the Code and 1.179-3 of the regulations, with the exceptions noted in regulations section 1.48-3(a)(1).

¹ Also released as Technical Information Release 922, dated Aug. 8, 1967.