Rev. Rul. 66-71

Advice has been requested whether the cost of work done to deepen a portion of a harbor alongside the taxpayer's pier leading to a navigable channel, for the purpose of making the pier more accessible to shipping vessels, creates an asset which may be depreciated under section 167 of the Internal Revenue Code of 1954. The taxpayer did not own the underlying land, the subject of the dredging operation, but was operating under permits issued by various governmental agencies for an indefinite period of time. The experience of the taxpayer indicated that silting was not a problem in this case.

Section 167 of the Code provides as follows:

(a) General Rule .-There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)-

(1) of property used in the trade or business, or

(2) of property held for the production of income.

Section 1.167(a)-2 of the Income Tax Regulations provides in part as follows:

The depreciation allowance in the case of tangible property applies only to that part of the property which is subject to wear and tear, to decay or decline from natural causes, to exhaustion, and to obsolescence. The allowance does not apply to inventories or stock in trade, or to land apart from 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 as follows:

Intangibles .-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 an 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 merely because, in the unsupported opinion of the taxpayer, the intangible asset has a limited useful life. * * *

For Federal income tax purposes, no depreciation allowance may be made for exhaustion of assets, tangible or intangible, where no exhaustion susceptible of measurement is actually taking place. General Equipment Co. v. Commissioner , 2 B.T.A. 804 (1925).

In those instances where particular conditions, such as silting, require regular repeated dredging there may be, based on the particular facts and conditions as in the case of Commodore's Point Terminal Co. v. Commissioner , 18 B.T.A. 385 (1929), acquiescence, C.B. IX-2, 13 (1929), grounds for depreciating dredging costs. In the instant case, however, neither silting nor other factual conditions were present to demonstrate a wasting or exhausting of the asset.

In cases where land rights are in the form of easements or permits allowing the use of the land by the taxpayer for an indefinite period of time, improvements such as the dredging of harbors and channels are intangible assets of a capital nature the costs of which are not depreciable under section 167 of the Code and section 1.167(a)-3 of the regulations, unless the useful lives of such assets are reasonably susceptible of measurement.

The mere fact that the dredged harbor or channel is associated with a depreciable pier or wharf does not establish the useful life of the dredged channel since the dredging costs are normally independent of the pier in that the dredging costs will not ordinarly be reincurred with each replacement or reconstruction of the pier itself.

Accordingly, expenditures for dredging to deepen that portion of the harbor alongside the taxpayer's pier leading to a navigable channel which are for the improvements to land rights are expenditures for an intangible asset, not depreciable under section 167 of the Code when the useful life of the asset is not reasonably susceptible of measurement.