Favorable guidance on deductible maintenance costs.

• Author: Packard, Pamela
• Position: IRS rule; commercial aircraft maintenance and overhaul expenses

Rev. Rul. 2001-4 provides favorable guidance for commercial aircraft maintenance and overhaul expenses. To operate aircraft, the Federal Aviation Administration (FAA) requires the taxpayer-airline to establish and adhere to continuous maintenance programs for its aircraft. These programs are incorporated into a maintenance manual, approved by the FAA, for each aircraft.

These manuals require periodic maintenance visits during the aircrafts' operating lives. The most extensive visit, usually called a D check, is required approximately every eight years. D checks prevent deterioration of the aircraft equipment's inherent safety and reliability levels and, if such deterioration occurs, restore the equipment to their inherent levels. In the three situations analyzed, the aircraft were fully depreciated and, when placed into service, the airline reasonably anticipated that they would have a useful life of up to 25 years--taking into account repairs and maintenance necessary to keep the aircraft in an ordinarily efficient operating condition.

In Situation 1, the taxpayer incurred $2 million to perform a D check on the airframe of an aircraft acquired in 1984 for $15 million (excluding engines). The airframe was extensively disassembled and certain tasks performed to prevent deterioration of its inherent safety and reliability levels. These tasks included lubrication and service, operational and visual checks and restoration of minor parts and components. If this work revealed unacceptable wear or dysfunction, the taxpayer was required to restore the airframe to an acceptable condition.

None of this work resulted in a material upgrade or addition to the airframe or involved replacement of any major components. The aircraft maintained its relative value (which continues to decline with age even if the D check is performed). This check did not extend the airframe's useful life.

In Situation 2, the same check was performed. However, the taxpayer found significant wear and corrosion on fuselage skin panels. Therefore, the airline replaced all skin panels on the aircraft's belly. These panels represented a significant portion of the aircraft's skin panels. This replacement materially added to the airframe's value. The taxpayer also used this maintenance visit to modify the airframe, by installing fire suppression, ground proximity warning and air phone systems.

In Situation 3, the taxpayer made substantial improvements to the aircraft (which was...