Rev. Rul. 69-229

Advice has been requested whether, under the circumstances described below, certain expenditures incurred by a taxpayer, a railroad company, for a part of the cost of a new state-owned highway bridge are depreciable capital expenditures. Advice has also been requested whether the portion of the cost required to be paid by the taxpayer in the future to maintain the bridge is deductible as an ordinary and necessary business expense.

A state department of highways requested its state public utility commission to approve the abandonment of an existing highway crossing under the taxpayer's railroad track. At the same time, at a point approximately 300 feet from the existing crossing, a new elevated highway bridge was to be constructed, as a replacement, over the taxpayer's existing track. The highway department's recommendations were part of an overall program that included plans to widen and relocate the existing highway. The public utility commission was further requested to allocate a part of the cost of the new bridge to the taxpayer, with the balance of the cost to be borne by the state. The purpose of the bridge was to effect a separation of the taxpayer's rail traffic from the highway traffic.

The public utility commission approved the highway department's recommendations and ordered the taxpayer railroad company to pay part of the cost of the new highway bridge. The taxpayer paid its allocated share. The commission order also required the taxpayer to bear a specified part of the future maintenance costs of the new highway bridge. The state, however, held sole title to the newly constructed highway bridge.

Section 263 of the Internal Revenue Code of 1954 provides that no deduction shall be allowed for amounts paid for permanent improvements or betterments made to increase the value of any property.

Section 1.162-4 of the Income Tax Regulations provides for the cost of incidental repairs that neither materially add to the value of property nor appreciably prolong its life to be deducted as an expense.

Under the facts in this case, it is held that the taxpayer's payment for part of the cost of the new highway bridge represents a capital expenditure for an intangible asset. The nature of the intangible asset is the long-term business benefit that will inure to the taxpayer by reason of the construction of the new highway bridge which will provide a safe and efficient new railroad and highway crossing. The taxpayer's expenditure is capital in nature even though no tangible property interest was acquired in the new bridge solely owned by the state. See Kauai Terminal Ltd. v. Commissioner, 36 B.T.A. 893 (1937). Also, see Revenue Ruling 68-607, C.B. 1968-2, 115, which holds that expenditures for improvements to a state-owned highway right-of-way resulted in the acquisition of an intangible asset in the form of a long-standing direct business benefit.

The taxpayer's expenditure was capital in nature even though it was involuntary, and even though the expenditure was for something that is not a direct part of the taxpayer's productive business (since the new bridge will carry highway traffic and not rail traffic). See Woolrich Woolen Mills v. United States, 289 F. 2d 444 (1961), where it was held that an involuntary expenditure to construct a filtration plant to eliminate pollution from mill waste was a capital expenditure even though it was not a productive part of the taxpayer's business.

Section 1.167(a)-3 of the regulations provides 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 an intangible asset may be the subject of a depreciation allowance.

The business benefit that gives rise to the intangible asset in this case will inure to the taxpayer for so long as the new highway bridge remains in use. Such intangible asset therefore has a useful life that is co-extensive with the period the new highway bridge will be in use. Since the period of use of the new highway bridge can be estimated with reasonable accuracy, the taxpayer's costs are recoverable through amortization deductions under section 167 of the Code over the same estimated period of time that the new highway bridge will be in use.

Accordingly, under the facts of this case, the expenditures incurred by the taxpayer for its share of the cost to construct the new highway bridge are capital expenditures for an intangible asset of long-term benefit to the taxpayer. The taxpayer's cost basis in the intangible asset is amortizable over the estimated period of time the new highway bridge will be in use. However, the portion of the future costs required to be borne by the taxpayer to maintain the new highway bridge will be deductible as ordinary and necessary business expense under section 162 of the Code in the years paid or incurred.