Costs of Replacing Retired Assets Were Deductible.

• Author: Fiore, Nicholas J.

The assets of telephone company X include telephone poles A and B. X placed A in service in 1979 on land it owned. X placed B in service in 1982 on land owned by company Y, under the terms of an easement permitting X to have one pole on Y's land. In 2000, X undertakes a project to replace telephone poles in the service area in which A is situated. As part of the project, X incurs costs in 2000 in removing and discarding A and installing a new telephone pole (Pole C) in the same location. X also undertakes a second project to replace telephone poles in the service area in which B is situated. X installs a new telephone pole (Pole D) on Y's land, but not in the same location as B. As part of this second project and to comply with the easement, X incurs costs in 2000 in removing and discarding/3.

Analysis

Sec. 162 and Regs. Sec. 1.162-1 generally allow a deduction for all the ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business.

Sec. 165 allows as a deduction any loss sustained during the tax year and not compensated for by insurance or otherwise. For the allowance under Sec. 165(a) of losses arising from the permanent withdrawal of depreciable property from use in a trade or business or in the production of income, Regs. Sec. 1.165-2(c) cross-references Regs. Sec. 1.167(a)-8(a), which permits, in part, a loss from physical abandonment of retired property.

Under Sec. 263(a) and Regs. Sec. 1.263(a)-1(a), no deduction is allowed for capital expenditures, such as amounts paid for new buildings or for permanent improvements or betterments made to increase the value of any property. Regs. Sec. 1.263(a)-2(a) provides that capital expenditures include the costs of acquisition, construction or erection of buildings, machinery and equipment, furniture and fixtures, and similar property with a useful life substantially beyond the tax year.

Sec. 263A generally requires taxpayers producing real or tangible personal property to capitalize direct material costs, direct labor costs and indirect costs properly allocable to the produced property. Sec. 263A(g)(1) provides that, for Sec. 263A purposes, the term "produce" includes construct, build, install, manufacture, develop or improve. Under Regs. Sec. 1.263A-1 (e)(3)(i), indirect costs are allocable to produced property under Sec. 263A when the costs directly benefit or are...