Revenue Ruling allows deduction for asset removal costs.

• Author: Afeman, Lynn
• Position: IRS Revenue Ruling

In February, the IRS issued Rev. Rul. 2000-7, holding that, when a depreciable asset is retired in conjunction with the installation or production of a replacement asset, the costs of removing the retired asset are not required to be capitalized under Sec. 263 or 263A as part of the replacement asset's costs. This ruling is one of a series of rulings issued by the Service in an attempt to provide some definitive guidance in the generally murky capitalization area.

The costs of removing assets have historically been allocated to the removed asset and, thus, deductible when the asset was retired. The impetus behind Rev. Rul. 2000-7 appears to be to clarify any confusion that might exist when the removal of an asset is followed by the installation of a replacement asset.

The ruling addresses two fact patterns. In the first, a telephone company removes an existing telephone pole from land it owns and installs a new telephone pole in the same location. In the second, the same taxpayer removes an existing telephone pole from land it leases as an easement and installs a new pole in a different location, but within the same easement in which the original pole was located. In both fact patterns, the taxpayer incurs costs in removing and discarding the telephone poles.

For both fact patterns, the IRS ruled that the taxpayer was not required to capitalize the removal costs under either Sec. 263(a) or 263A. Sec. 263(a) generally requires the capitalization of the cost of assets having a useful life extending substantially beyond the tax year (Regs. Sec. 1.263(a)-2(a)). Sec. 263A generally requires the capitalization of direct costs and an allocable share of indirect costs...