Classifying heavy maintenance expenditures.

• Author: Lerman, Jerry L.

Under Sec. 263(a), taxpayers cannot take a current deduction for amounts paid for permanent improvements or betterments that increase the value of property or restore it. However, Kegs. Sec. 1.162-4 allows a deduction for the cost of incidental repairs designed to keep business property in ordinary, working condition as long as the repairs do not materially add to the property's value or appreciably prolong its useful life. Although the rule appears simple, it is not easy to apply. Over the years, taxpayers, the IRS and the courts have struggled over whether an expenditure is a deductible repair or a nondeductible improvement.

Rev. Rd. 2001-4

In Rev. Rul. 2001-4, the Service addressed, under three different scenarios, when a taxpayer can currently deduct the cost of heavy maintenance for an aircraft. The ruling only discusses aircraft, but it offers guidance on the IRS'S position on deductibility of expenditures for other types of property (such as machinery and equipment and real estate).

In the ruling, X is a commercial airline. The Federal Aviation Administration (FAA) requires X to adhere to a continuous maintenance program for each aircraft in its fleet. X's maintenance manuals require a variety of periodic visits at various intervals during each aircraft's operating life. The most extensive of these is a "heavy maintenance visit" performed every eight years. The purpose of this visit is to prevent or correct deterioration of the equipment's' inherent safety and reliability levels and to restore the equipment to its inherent levels. If kept on this maintenance schedule, the aircraft would be expected to last 25 years. In addition, in each of these situations, the aircraft is fully depreciated for Federal income tax purposes at the time of the heavy maintenance visit.

Situation 1: X acquired Aircraft 1 for $15 million in 1984. In 2000, X spent $2 million for a heavy maintenance visit. X basically stripped the aircraft down to its frame, removing such items as the engines, landing gear, seats, side and ceiling panels and floorboards. Mechanics then performed certain tasks on the parts, such as lubrication, service and operational, visual, inspection and functional checks. When deterioration was discovered, the mechanics took steps to restore a part to an acceptable condition (e.g., burnishing corrosion, repairing cracks, applying skin patches).

Heavy maintenance also involved a number of other tasks, such as stripping and repainting the...