Rev. Rul. 75-137

In view of the recent reconsideration by the Internal Revenue Service of the nature of certain clearing and grading costs, the Service has reviewed whether the costs incurred in excavating water canals and dredging channels in harbors and slips are investments in tangible property.

In Rev. Rul. 72-403, 1972-2 C.B. 102, modifying Rev. Rul. 71-121, 1971-1 C.B. 80, the Service concluded that the costs of clearing and grading incurred as part of the construction of electric transmission and distribution lines on rights of way acquired by easement are investments in tangible assets. Similarly, in Rev. Rul. 71-120, 1971-1 C.B. 79, the Service concluded that the costs of clearing and grading incurred as part of the construction of a natural gas pipeline on rights of way acquired by easement are investments in tangible assets. In Rev. Rul. 71-448, 1971-2 C.B. 130, clearing and grading costs incurred in connection with the construction of a crude oil and petroleum products pipeline were held to be investments in tangible assets. These determinations reversed prior Service position established in Rev. Rul. 65-264, 1965-2 C.B. 53.

The costs of excavating water canals and dredging channels in harbors and slips, like clearing and grading costs, are construction costs for land improvements and therefore should be treated similarly for Federal income tax purposes. Therefore, costs for excavation and dredging are investments in tangible assets. See Norfolk Shipbuilding & Drydock Corp. v. United States, 321 F. Supp. 222 (E.D. Va. 1971).

Rev. Rul. 66-71, 1966-1 C.B. 44 (dredging costs incurred to deepen a portion of a harbor), Rev. Rul. 68-280, 1968-1 C.B. 20 (cost of dredging a river bottom at a marine terminal facility), Rev. Rul. 68-483, 1968-2 C.B. 91 (costs of dredging a slip), and Rev. Rul. 69-78, 1969-1 C.B. 61 (excavation costs of a cooling water canal), are modified to the extent they hold that the costs considered there were for intangible assets. Rev. Rul. 69-606, 1969-2 C.B. 33, which holds that earthen tanks had indeterminable useful lives, is clarified to the extent it implies that the tanks were intangible property.

Generally, costs for land improvements such as clearing and grading are not expenditures for property that is subject to depreciation. Such costs are capital expenditures and become part of the cost basis of the land. Whether land improvement costs for excavation and dredging are depreciable for Federal income tax purposes depends on whether the asset is actually exhausting and that such exhaustion is susceptible of measurement. See Rev. Rul. 72-96, 1972-1 C.B. 67.

The excavation and dredging costs described above were not included in any of the guideline classes in Rev. Proc. 62-21, 1962-2 C.B. 418, and are not included in any asset guideline classes in Rev. Proc. 72-10, 1972-1 C.B. 721, as modified and supplemented by other Revenue Procedures, for purposes of section 1.167(a)-11 or 1.167(a)-12 of the Income Tax Regulations.

Rev. Rul. 66-71, Rev. Rul. 68-280, Rev. Rul. 68-483, and Rev. Rul. 69-78 are modified Rev. Rul. 69-606 is clarified.