Rev. Rul. 73-295

In view of the Revenue Act of 1971, Pub. L. 92-178, 1972-1 C.B. 443, 446, further consideration has been given to Rev. Rul. 67-285, 1967-2 C.B. 7. That Revenue Ruling provides that: (1) new additions to the track structures constructed by the taxpayer with new or used material qualify as "new section 38 property" for investment credit purposes; (2) replacements which represent reconstruction likewise qualify; and (3) costs incurred which are in fact for repairs, including the costs of materials used therefor, and removal costs are not qualified investments in section 38 property.

Section 104(g) and 104(h) of the Revenue Act of 1971 amended retroactively subsection 48(a) of the Internal Revenue Code of 1954 by adding paragraph (9), effective for taxable years ending after December 31, 1961, for specific replacements after that date. In addition, section 102(d)(2) of the Act amended section 47(a) of the Code in the case of any property which ceases to be "section 38 property" after August 15, 1971, and provides that section 46(c)(2) of the Code shall be applied as amended by section 102(a) of the Act with respect to periods of time for claiming or recapturing the investment credit.

Section 48(a)(9) of the Code provides that in the case of a railroad using the retirement-replacement method of accounting for depreciation, replacement track material is "section 38 property" if (1) the replacement is made pursuant to a scheduled program for replacement, (2) the replacement is made pursuant to observations by maintenance-of-way personnel of specific track material needing replacement, (3) the replacement is made pursuant to the detection by a rail-test car of specific track material needing replacement, or (4) the replacement is made as a result of a casualty. Replacements made as a result of a casualty are "section 38 property" only to the extent that, in the case of each casualty, the qualified investment with respect to replacement track material (ties, rail, other track material, and ballast) exceeds $50,000.

The depreciable part of the railroad track structure is made up of a group or groups of individual items of ties, rail, other track material and ballast. These items are "mass assets" as defined in section 1.47-1(e) of the Income Tax Regulations. Since additions to and replacements of the railroad track structure are part of the "mass assets," the provisions of section 1.47-1(e)(2) of the regulations are applicable in computing or recomputing the qualified investment for purposes of section 46 of the Code. Additions and replacements that are constructed or reconstructed with new track material have different average periods of service than those constructed or reconstructed with used track materials; therefore, in applying the provisions of section 1.47-1(e)(2) of the regulations, separate average periods of service must be determined where new and used track materials are installed.

Accordingly, as provided by section 48(a)(9) of the Code, replacements of railroad track material in the track structure exclusive of removal costs, qualify as "new section 38 property" for taxable years ending after December 31, 1961. Since section 102(d)(2) of the Act amended section 47(a) of the Code with respect to periods of time for computing or recomputing qualified investment, and the additions to and replacements of the railroad track structure are "mass assets," the provisions of section 1.47-1(e)(2) of the regulations are applicable in computing or recomputing the qualified investment credit for the purposes of section 46(c)(2) of the Code for both new and used material.

However, see section 107(a) of the Act which repeals section 46(c)(4) and section 47(a)(4) of the Code and eliminates the exceptions to the recapture rules for casualties, theft, and other dispositions occurring after August 15, 1971.

Rev. Rul. 67-285 is modified regarding the qualification of replacements of railroad track structure as "new section 38 property" and also regarding the computing or recomputing of the investment credit, for the purposes of section 47 of the Code.