IRS Employee Recommends Clarifying Language in Repair Regs

We continue to have significant controversies in our examinations with "roof repairs." We ask for additional clarification. The Temporary Regulations contain contradictory examples and discussions about when the cost related to the roof should be deductible.

A roof, is defined (see Marshall and Swift, for example) as joists or support elements, decking, flashing, gutters and downspouts, and a waterproof layer. This waterproof layer can be shingles. Shingles may be made from a number of substances including wood, metal, stone, ceramic, fiberglass/asphalt, and others. The waterproof layer may be metal sheeting. It may be a built up roof consisting of alternating layers of felt and bitumen, typically covered with gravel. The waterproof layer may be a polymer membrane such as EPDM, PVC, or similar substances.

The purpose of a ceiling is to maintain the environment within the building. The purpose of a roof is to keep water out of the building structure. Without a waterproof cover (roof), a building's structural components would eventually decay or deteriorate causing a large financial loss to the building's owner. The purpose of the joists and decking is to support the waterproof layer, Without waterproofing, decking provides no useful function, except in those instances when the decking also serves as a ceiling, such as a warehouse, for example.

In the Explanation of Provisions, Section VI B 2, the author states that the replacement of an entire roof constitutes an improvement to the building unit of property. Notwithstanding the definition quoted above, when most people "replace a roof" they mean that they replace the waterproof layer,

In Section 1.263(a)3T(h)(2) Examples 13, 14, and 15 provide some examples with respect to Betterments. We have no problem with storm damage. That issue, so far, has not been controversial outside of the desire to deduct under Section 162 and 164 for the same event. Example 14 is troublesome because we don't know why the asphalt shingles are comparable. What if the wooden shingles are available and the owner elects asphalt because they are stronger? Would that be a betterment? In example 15, the betterment consists of an upgrade to the waterproofing layer. Where do we draw the line? What about a 20-year, non-prorated warranty? What about maintenance-free and a non-prorated warranty? How do we determine when the betterment rules apply?

Then, in the next section, Restorations, Examples 12 and 13 discuss replacement of the roof (totally and partially) including sheathing and rafters. Finally, in Example 14, the text argues that the waterproof layer is not a major component. Yet in Example 15, immediately following, the furnace is the major component of the HVAC. Perhaps in Example 14 a key component is the replacement of a membrane with another membrane which does not result in a betterment. To state that the waterproofing is not a major component ignores reality.

We ask for clarification.

2. Structural Components

We are still facing arguments from the practitioner community that internal, non-load bearing walls are not part of the unit of property. We refer them to the definitions in Section 48, but this should be clarified and expanded in the final regulations.

Our second concern here is that the authors discuss "moving the wall." Interior walls constructed of gypsum wallboard on metal or wooden studs are not moved. The old one is destroyed and a new wall is constructed, usually from new materials because the wallboard is destroyed and usually the studs are damaged. We ask that you use different language when describing modification to the buildings.

In the now-infamous Example 6, building refresh, the example describes "moving one wall." Please provide a more accurate description. If one can move the wall, it is not 1250 property. Second, the example describes how the purchases of new tables or displays are properly capitalized as new section 1245 property. If the removal of the old wall was to accommodate the newly-acquired 1245 property, should not the cost of removing the old wall and building a new wall be capitalized also? If you make improvements to a factory, such as concrete pedestals on which to mount new machinery or equipment, the concrete additions would be capitalized as part of the cost of the new machinery or equipment.

Further, some guidance on "the purpose of the expenditure" would be helpful to both taxpayers and examiners. We would respectfully ask that you do not ask us to examine, investigate, substantiate, or verify "intent."

3. Asbestos Removal

Example 2 in Betterments describing the removal of asbestos in inconsistent with PLR 9240004, PLR 9411002, and Norwest Corp. v. Comm. 108 T.C. 265. Please reconsider this example.