Rev. Rul. 70-392

Advice has been requested whether, under the circumstances described below, expenditures for relocating certain existing capitalized physical assets are ordinary and necessary business expenses under section 162 of the Internal Revenue Code of 1954.

The taxpayer (a corporation) and its subsidiaries, a group of regulated electric utility companies, maintain and operate integrated electric systems that include production, transmission, and distribution facilities. In the operation of its system, the taxpayer, using its own work forces and independent contractors, regularly engages in the improvement and maintenance of its transmission and distribution facilities.

The taxpayer incurred expenditures for increasing the distribution voltage to that deemed necessary to provide for the present and the anticipated increase in electrical load including line conversions. The taxpayer made changes to component parts of its facilities that required (a) the retirement of some existing capitalized physical assets, the costs of which were "written out" of the capital account, and their replacement with new and different type assets all of the costs of which were capitalized, and (b) the addition of some new components the costs of which were capitalized.

In addition, the taxpayer incurred labor and transportation costs in relocating existing capitalized physical assets (physical assets that remained in use after relocation) as follows: (a) transferred existing conductors to higher voltage insulators; (b) transferred existing street light circuits and crossarms to new poles; (c) relocated existing transformers, transformer stations, crossarms, and associated equipment; (d) relocated existing poles, jumpers, service wires, guys, fixtures, insulator strings, and armor rods; and (e) performed miscellaneous repair and maintenance work on existing components that were relocated. The relocating of the existing capitalized physical assets did not materially change any of the physical or mechanical characteristics of the assets relocated; nor did it add to their value or prolong their life. The costs incurred for relocation of these physical assets merely allow the assets already capitalized to remain in service for the balance of their original useful life. In each instance where new assets were installed, such as higher voltage insulators, new poles, etc., to allow the system to operate at a higher voltage, their costs were capitalized.

The specific question presented in the instant case is whether the labor and transportation costs incurred in relocating the existing capitalized physical assets are to be treated, for Federal income tax purposes, as capital expenditures as part of a general plan for improvement and rehabilitation of property, or as ordinary and necessary business expenses.

Section 162(a) of the Code states that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

Section 1.162-1(a) of the Income Tax Regulations provides that business expenses deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer's trade or business, except items which are used as the basis for a deduction or a credit under provisions of law other than section 162 of the Code.

Section 1.62-4 of the regulations provides that the cost of incidental repairs that 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 an expense, provided the cost of acquisition or production or the gain or loss basis of the taxpayer's plant, equipment, or other property is not increased by the amount of such expenditures.

The determination of which expenditures are capital expenditures and which are ordinary and necessary business expenses is dependent on the particular facts and surrounding circumstances. The expenditures being considered in the instant case were for the labor and transportation costs of relocating physical assets already placed in service by the taxpayer and capitalized on its books for Federal income tax purposes.

The costs incurred in the instant case for labor and transportation costs in relocating existing capitalized physical assets are distinguished from the costs of a general plan of improvement and rehabilitation of property, which plan generally results in adding to the value of the property or appreciably prolonging its useful life. Here, the relocation of the previously capitalized physical assets was performed in order to continue their use as part of the improved physical facility. Their relocation did not add to their value or appreciably prolong their useful life. Neither did the relocated physical assets contribute to the higher voltage of the system that was accomplished by new assets installed and capitalized such as higher voltage insulators, etc.

Accordingly, based on the facts in the instant case, it is held that the expenditures for relocating the existing physical assets are ordinary and necessary business expenses under section 162 of the Code and the regulations thereunder.