Rev. Rul. 54-578

Advice has been requested relative to the treatment for Federal income tax purposes of expenditures made in order to keep in a serviceable condition railroad freight cars which have been fully amortized under sections 124 and 124A of the Internal Revenue Code of 1939.

The taxpayer is making expenditures with respect to certain series of its freight cars which have been fully amortized over a 60-month period or less under sections 124 and 124A of the Code. The normal total expected service life (i.e., the total service life used in determining depreciation rates) of the cars is about 27 years.

Section 39.124A(a)-1 of Regulations 118 provides that a person is entitled at his election to a deduction with respect to the amortization of the adjusted basis (for determining gain) of an emergency facility, such amortization to be based on a period of 60 months. Section 124A of the Code provides in part as follows:

* * * The amortization deduction * * * shall * * * be in lieu of the deduction * * * provided by section 23(1) relating to exhaustion, wear and tear, and obsolescence. * * *

Section 39.23(a)-4 of Regulations 118 provides that the cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as expense, provided the cost of acquisition or production or the gain or loss basis of the taxpayer's plant, equipment, or other property, as the case may be, is not increased by the amount of such expenditures. Repairs in the nature of replacements, to the extent that they arrest deterioration and appreciably prolong the life of the property, should be charged against the depreciation reserve if such account is kept.

Whether the cost of any repairs made should be charged to operating expenses or capitalized is a question of fact to be determined in each case and is not affected by the fact that the asset with respect to which the expenditure has been made has been amortized in full or in part as an emergency facility. In this connection, the useful life of a facility is its normal expected service life as distinguished from the 60-month amortization period.

Accordingly, it is held that expenditures for repairs made with respect to units of equipment amortized as emergency facilities under sections 124 and 124A of the Internal Revenue Code over a 60-month period or less, as well as for units subject to depreciation over the total normal expected service life period of the equipment, are proper charges to operating expenses provided the expenditures are in fact for repairs and not for rebuilding which appreciably extends the total normal expected service life or materially adds to the value of the asset.