Capital expenditures - Uncle Fed's Tax*Board

Capital expenditures 

66.1 Advertising costs; fair. Amounts paid by 

an accrual basis taxpayer to a controlled corporation 

for advertising and promoting the taxpayer’s 

products at a fair must be capitalized and amortized 

over the periods during which the fair is in 

operation. §1.162–1. (Sec. 162, ’86 Code.) 

Rev. Rul. 68-283, 1968–1 C.B. 63. 

66.2 Airlines route; development and certification 

costs. Expenditures made by an airline in 

acquiring “temporary” certificates of public convenience 

and necessity from the Civil Aeronautics 

Board are capital expenditures depreciable over 

the term of the award. Costs incurred in defending


temporary authority are depreciable over the 

remaining life of such authority. Costs incurred 

beginning with the taxable year of the Board’s 

decision to determine permanent authorization, as 

well as any unrecovered costs of “temporary” certificates 

converted to “permanent” certificates, 

are not depreciable. In cases of “mixed awards,” 

costs reasonably allocated to authority denied are 

deductible losses; costs allocated to certificates 

awarded on a temporary basis are depreciable over 

the term of the award; and costs allocated to permanent 

certificates are not depreciable. Rev. Rul. 

56-600 amplified. §§1.165-1, 1.167(a)-3, 

1.263(a)-1. (Secs. 165, 167, 263; ’86 Code.) 

Rev. Rul. 67-113, 1967-1 C.B. 55. 

66.3 Airlines route; development costs. 

Expenditures incurred in connection with the 

acquisition and development of air routes are capital 

expenditures. No part of such expenditures 

may be charged off due to suspension of operations, 

but must be deferred until the abandonment 

of the route. Amplified by Rev. Rul. 67–113. (Sec. 

263, ’86 Code.) 

Rev. Rul. 56-600, 1956-2 C.B. 171. 

66.4 Annuity payments exchanged for dower 

interest in farm. Annuity payments payable out 

of income from farm property distributed by a probate 

court to a decedent’s son in exchange for the 

release of a widow’s dower rights and interest in 

the property are nondeductible capital expenditures. 

§§1.162-1, 1.263(a)-1. (Secs. 162, 263; ’86 

Code.) 

Rev. Rul. 72-81, 1972-1 C.B. 98. 

66.5 Appraisal fees on mortgage loans; life 

insurance company. Appraisal fees incurred by a 

life insurance company in connection with the 

acquisition of mortgage loans are capital expenditures 

to be amortized over the life of the debt. The 

fees are not current expenses related to investment 

income to be deducted in the year incurred. 

§1.804-4. (Sec. 804, ’86 Code.) 

Rev. Rul. 67-369, 1967-2 C.B. 235. 

66.6 Attorney fees. Attorneys obtained a judgment 

against the decedent for services they performed 

regarding a stock transaction, the proceeds 

from which were ordered paid into the court and 

subsequently disbursed to the attorneys and estate. 

Held, a portion of the judgment amount was a capital 

expenditure. (Sec. 113(b)(1), ’39 Code; Sec. 

1016, ’86 Code.) 

A. P. Steckel, 26 T.C. 600, Nonacq., 1957-1 

C.B. 6. 

66.7 Bankrupt corporations; trustee’s expenditures. 

Costs and expenses incurred by a corporation’s 

trustee in bankruptcy in connection with 

the institution and administration of reorganization 

proceedings under Chapter X of the Bankruptcy 

Act are capital expenditures of the corporation; 

however, such expenditures in a liquidation 

under Chapters I through VII of the Act, except for 

expenses connected with sales of assets that must 

be offset against proceeds, are deductible by the 

corporation under section 162. In either the reorganization 

or liquidation bankruptcy, the expenses 

of the trustee in operating the bankrupt’s business 

are deductible under section 162. I.T. 2004 superseded. 

§31.162–1, 1.263(a)–1. (Secs. 162, 263; 

’86 Code.) 

Rev. Rul. 77-204, 1977-1 C.B. 40. 

66.8 Baseball player contracts; acquisition 

costs; change of accounting method. Conditions 

are set forth under which a major league baseball 

club will be permitted to change its method of 

accounting for acquisition costs of uniform baseball 

players’ contracts to one consistent with Rev. 

Rul. 67–379 for taxable years beginning after 

October 31, 1967. The adjusted basis of the contract 

as well as its useful life is subject to verification 

and acceptance upon audit. §§1.446–1, 

1.481-1, 1.1031(a)-1. (Secs. 446, 481, 1031; ’86 

Code.) 

Rev. Rul. 70-318, 1970-1 C.B. 113. 

66.9 Bonuses and commissions for securing 

customers. Bonuses and commissions paid to 

salesmen and dealers and plumbing contractors by 

a gas distributor for securing five-year leases for 

hot water heaters are capital expenditures amortizable 

over the term of the lease. Rev. Rev. 68–651 

distinguished. §§1.162-1, 1.263(a)-2. (Secs. 162, 

263; ’86 Code.) 

Rev. Rul. 69-331, 1969-1 C.B. 87. 

66.10 Bottom hole contribution. A “bottom 

hole” contribution is includable in the recipient’s 

gross income and must be treated as a capital 

expenditure by the payor. §§1.61–1, 1.263(a)-1, 

1.612-4. (Secs. 61, 263, 612; ’86 Code.) 

Rev. Rul. 80-153, 1980-1 C.B. 10. 

66.11 Brokerage fees; long-term lease. The 

entire amount of commission paid to a broker for 

obtaining a long-term property lease is a capital 

expenditure that must be amortized over the life of 

the lease beginning with the first day of such lease 

regardless of the method of accounting used by the 

taxpayer. I.T. 2263 superseded. §§1.162-1, 

1.167-1, 1.263(a)-1. (Secs. 162, 167, 263; ’86 

Code.) 

Rev. Rul. 70-408, 1970-2 C.B. 68. 

66.12 Brokerage fees; stock reacquisition. 

Brokerage fees paid by a domestic corporation in 

acquiring its own stock for the purpose of bolding 

it as treasury stock or retirement, are part of the 

purchase price and are not business expenses 

deductible under section 162, O.D. 852 superseded. 

§§1.162–1, 1.263(a)–2. (Secs. 162, 263; 

’86 Code.) 

Rev. Rev. 69-561, 1969-2 C.B. 25. 

66.13 Camp site. Preliminary expenses 

incurred in search of a site for a boys’ camp and 

expenses attributable to the promotion of the business 

to be established are not deductible as either 

business expenses or nonbusiness expenses. The 

expenses incurred in the acquisition of a lease on 

the selected site are capital in nature and are amortizable 

over the life of the lease. Rev. Rul. 55-442 

superseded. §§1.162-1, 1.178-1, 1.212-1, 

1.263(a)-1. (Secs. 162, 178, 212, 263; ’86 Code.) 

Rev. Rul. 73-421, 1973-2 C.B. 33. 

66.14 Carrying charges; intercompany loan 

interest; election. The listing of interest under the 

heading “deferred intercompany interest” on a 

schedule of a subsidiary that was attached to the 

consolidated return of an affiliated group of corporations 

is a proper election to capitalize interest on 

an intercompany loan. Rev. Rul. 70-539 distinguished. 

§§1.266-1, 1.1502-13. (Secs. 266, 1502; 

’86 Code.) 

Rev. Rul. 76-325, 1976-2 C.B. 88. 

66.15 Carrying charges, etc.; election 

improper. A manufacturing corporation that for 

ten years capitalized taxes and carrying charges 

incurred on machinery used in its business without 

having properly elected to do so adopted a method 

of accounting with respect to such expenses and is 

precluded from amending its returns for open 

years and deducting the expenses for such years. 

Rev. Rul. 70–539 distinguished. Clarified by Rev. 

Rul. 77-236. §§1.266-1, 1.446-1. (Secs. 266, 

446; ’86 Code.) 

Rev. Rul. 75-56, 1975-1 C.B. 98. 

66.16 Carrying charges, etc.; election 

improper. A change in accounting method relating 

to the capitalization of carrying charges and 

taxes under section 266 requires computation of 

the necessary adjustment pursuant to section 481. 

Rev. Rul. 75-56 clarified. §1.266-1. (Sec. 266. 

’86 Code.) 

Rev. Rul. 77-236, 1977-2 C.B. 84. 

66.17 Carrying charges, etc.; election to 

capitalize. A corporation, engaged in developing 

real estate, that failed to file a statement with its 

original returns identifying the carrying charges, 

interest and taxes it had elected to capitalize, did 

not make a valid and binding election under section 

266 and is not precluded from deducting such 

expenses as current operating expenses in 

amended returns. Distinguished by Rev. Ruls. 

75-56 and 76-325. §1.266-1. (Sec. 266, ’86 

Code.) 

Rev. Rul. 70-539, 1970-2 C.B. 70. 

66.18 Car-top sign; rural mail carrier. The 

cost incurred by a rural mail carrier for a U.S. mail 

identification car-top sign is a capital expenditure 

recoverable through depreciation. Since the sign is 

attached to the vehicle used in delivering mail, the 

depreciation deduction is allowable as a transportation 

expense in arriving at adjusted gross 

income. §§1.62–1, 1.162–1, 1.263(a)–1. (Secs. 

62, 162, 263; ’86 Code.) 

Rev. Rev. 67-444, 1967-2 C.B. 80. 

66.19 Cattle breeding service agreement. A 

cash method taxpayer entered into a cattle breeding 

service agreement (termed a lease) under 

which the taxpayer leases a cow from a herd 

owner. The agreement provides that a calf will be 

produced within 1 year of mating, will remain with 

its mother for 1 year, and will be healthy and sound 

for breeding at the time of weaning. The agreement 

terminates when the calf is weaned, at which 

time the taxpayer may take possession of the calf, 

sell it, or place it in a herd management program. 

The cost attributable to the service agreement, 

including a breeding fee and the initial costs of caring 

for a cow and calf until the calf is weaned, are 

capital expenditures under section 263. 

§§1.162-12, 1.263(a)-1. (Secs. 162, 263; ’86 

Code.) 

Rev. Rul. 79-176, 1979-1 C.B. 123. 

66.20 Christmas trees; planting and cultivation. 

The cost of silviculture practices, such as 

weeding, cleaning, and noncommercial thinning, 

are deductible business expenses in connection 

with the cultivation of Christmas trees as a trade or 

business. However, expenditures for planting, 

basal pruning, stump culture, pruning, related land 

improvements, and equipment or other depreciable 

assets must recapitalized. Modified to provide 

that expenditures for shearing and basal pruning 

are deductible business expenses for taxable years 

ending after May 24, 1971. §§1.162-1, 

1.263(a)–1, 1.611-3, 301.7805–1. (Secs. 162, 

263, 611, 7805; ’86 Code.) 

Rev. Rul. 66–18, 1966-1 C.B. 59; Rev. Rul. 

71-228, 1971–1 C.B. 53; Daniel D. Kirrley, 51 

T.C. 1000, Acq., 1971-2 C.B. 3. 

66.21 Citrus and almond trees; maintenance 

before permanent planting. Expenses incurred 

in maintaining citrus and almond trees at any time 

before the close of the four-year period beginning 

with the year in which the trees are planted in their 

permanent moves must be capitalized. Rev. Rul. 

80-25 clarified. §1.278-1. (Sec. 278, ’86 Code.) 

Rev. Rul. 83-128, 1983-2 C.B. 57. 

66.22 Citrus grove; irrigation system. The 

taxpayer placed in service an irrigation system 

used in the development of a citrus grove. 

Depreciation on the irrigation system prior to the 

time the grove reaches the income producing stage 

must be capitalized and recovered over the useful 

life of the grove, beginning in the year the grove 

reaches an income producing stage. Rev. Rul. 

80-25 modified. §§1.167(a)-1, 1.263(a)-2, 

1.278-1, 301.7805.1. (Secs. 167, 263, 278, 7805; 

’86 Code.) 

Rev. Rul. 83-67, 1983-1 C.B. 74. 

66.23 Citrus groves; trees and irrigation system. 

A taxpayer, who was developing a citrus 

grove, planted citrus trees and installed and placed 

in service an irrigation system. The taxpayer may


take a depreciation deduction for the cost of the 

trees beginning in the year the trees first reach an 

income producing stage and for the cost of the 

irrigation system beginning in the year the system 

is placed in service. Modified by Rev. Rul. 83–67; 

Clarified by Rev. Rul. 83-128. §§1.167(a)-1, 

1.263(a)-2, 1.278-1. (Secs. 167, 263, 278; ’86 

Code.) 

Rev. Rul. 80-25, 1980-1 C.B. 65. 

66.24 Citrus trees; income producing state. 

Revenue Ruling 65–104, relating to the qualification 

of citrus trees as section 38 property for purposes 

of the investment credit, is clarified to 

remove the implication that all expenditures necessary 

to bring orchard trees to an income producing 

state must be capitalized. §§1.162–12, 

1.175-1, 1.180-1, 1.182-1. (Secs. 162, 175, 180, 

182; ’86 Code.) 

Rev. Rul. 66-183, 1966-2 C.B. 47. 

66.25 Clearing of right-of-way; quarry property. 

Costs incurred by a quarry operator to reimburse 

a power company for the relocation of 

power transmission facilities located on a right-ofway 

through the quarry property are additional 

capital expenditures made to acquire full rights to 

the mineral deposits, recoverable through depletion, 

and are not “development expenditures” 

subject to section 616 of the Code. §1.616–1. (Sec. 

616, ’86 Code.) 

Rev. Rul. 66-170, 1966-1 C.B. 159. 

66.26 Coal mining; airshaft, compressor and 

fan to maintain normal output. Due to a recession 

of the working faces of their mine, a coal mining 

company made expenditures for an air shaft, 

fan, and compressor which the Commissioner 

contended were capital improvements with a useful 

life of 20 years. Held, the expenditures were 

incurred to maintain normal output of the mine 

and are allowable business expenses. The Commissioner’s 

contention that the expenditures must 

be shown to be minor rather than major was without 

authority. (Sec. 23(m), ’39 Code; Sec. 611, ’86 

Code.) 

Roundup Coal Mining Co., 20 T.C. 388, Nonacq., 

1954–1 C.B. 8. 

66.27 Coal mining equipment to maintain 

normal output of coal. The sole shareholder of a 

mining corporation deducted, as a supply expense, 

the cost of movable conveyor equipment with an 

approximate life expectancy of five years that was 

used to maintain the production level of coal but 

neither materially increased the mine’s value nor 

deceased the cost of production. Held, the expenditures 

were not required to be capitalized but 

were deductible as ordinary and necessary business 

expenses. (Sec. 162, ’86 Code.) 

Leland Adkins. 51 T.C. 957, Acq., 1970-1 C.B. 

xv. 

66.28 Computer software; development 

costs. Guidelines are provided for use in connection 

with the examination of income tax returns 

involving deductions of costs incurred in the 

developing, purchasing or leasing of computer 

software, effective with respect to taxable years 

ending after October 27, 1969; however, the Service 

will not disturb taxpayers’ treatment of software 

costs for prior taxable years except to the 

extent such treatment is markedly inconsistent 

with the practices set forth. §§1.162-4, 1.162–11. 

(Sec. 162, ’86 Code.) 

Rev. Proc. 69-21, 1969–2 C.B. 303. 

66.29 Computer software; development 

costs; accounting method. The capitalization of 

software costs with respect to a new computer 

constitutes a change in method of accounting 

requiring the Commissioner’s consent, where, in 

prior years, with respect to another computer, a 

taxpayer has always expensed the software costs 

for both book and Federal income tax purposes. 

§§1.162-4, 1.446-1. (Secs. 162, 446; ’86 Code.) 

Rev. Rul. 71-248, 1971-1 C.B. 55. 

66.30 Construction of speculative housing. 

The costs (including land) incurred in the 

construction of a house for speculative sale should 

be capitalized regardless of the taxpayer’s overall 

method of accounting, but not taxes and carrying 

charges for which an election to capitalize has not 

been made under section 266. Such costs shall be 

applied against the amount realized upon sale of 

the house, for purposes of determining gain or 

loss. Administrative and selling expenses may be 

deducted in the year incurred or paid if such 

method clearly reflects income. §§1.266–1, 

1.446-1, 1.461-1. (Secs. 266, 446, 461; ’86 

Code.) 

Rev. Rul. 66-247, 1966-2 C.B. 198. 

66.31 Contribution to state construction of 

bridge. A voluntary contribution by a corporation 

to defray in part the cost to the state of construction 

of a bridge which can be used by the corporation 

to transfer stone from its quarry on one side of a 

river to its plant on the other side is an exhaustible 

capital expenditure depreciable or amortizable 

over the estimated useful life of the bridge (period 

of economic usefulness to the corporation). (Sec. 

263, ’86 Code.) 

Rev. Rul. 58-373, 1958-2 C.B. 125. 

66.32 Contributions to exempt service organization. 

Payments by a group of taxpayers to a 

nonprofit exempt organization organized by them 

for the purpose of rendering necessary marine 

radio telephone service, to the extent used by the 

corporation to purchase equipment, constitute a 

capital investment subject to depreciation. That 

portion of the payments utilized by the corporation 

to meet current operating expenses constitutes 

payment for services rendered by it to the taxpayers 

and is deductible by them as a business 

expense. §§1.162–1, 1.263(a)–1. (Secs. 162, 263; 

’86 Code.) 

Rev. Rul. 58–534, 1958-2 C.B. 125. 

66.33 Contributions to hospital association. 

Payments by a corporation to a hospital association, 

under an agreement which furnished the taxpayer 

with particular rights and interests for its 

employees for a period often years in certain properties 

and facilities of a hospital to be constructed, 

are not deductible as charitable contributions or as 

business expenses, but constitute capital expenditures. 

§§39.23(a)–1, 39.23(a)–1, 39.24(a)–2. 

(Secs. 23(a), 23(q), 24(a), ’39 Code; Secs. 162, 

170, 263, ’86 Code.) 

Rev. Rul. 55-616, 1955-2 C.B. 545. 

66.34 Corporate salaries in connection with 

corporate mergers and acquisitions. The portion 

of the compensation paid by a corporation to 

its employees attributable to services performed in 

connection with corporate mergers and acquisitions 

must be capitalized; however, such amounts 

paid with respect to abandoned plans for mergers 

or acquisitions are deductible as losses in the year 

of abandonment. §§1.165–1, 1.263(a)–1. (Secs. 

165, 263; ’86 Code.) 

Rev. Rul. 73–580, 1973-2 C.B. 86. 

66.35 Costs of completed homes and homes 

under construction. Construction costs of completed 

homes and costs of construction in progress 

are capital expenditures under section 263, and 

may not be inventoried under the LIFO inventory 

method. Rev. Rul. 69-536 amplified. 

§§1.263(a)-1, 1.446-1, 1.472-1. (Secs. 263, 446, 

472; 86 Code.) 

Rev. Rul. 86-149, 1986-2 C.B. 67. 

66.36 Cost of employee benefits; selfconstructed 

property. Costs of certain employee 

benefits for employees engaged in self-constructing 

the employer’s property are nondeductible 

capital expenditures under section 263. I.T. 3408 

obsoleted. §§1.162–10, 1.263(a)-1, 1.263A-1T, 

1.404(a)-1, 1.419-1T. (Secs. 162, 263, 263A, 

404, 419; ’86 Code.) 

Rev. Rul. 92-31, 1992-1 C.B. 101. 

66.37 Cultural practices; farmers. A farmer 

who elected to capitalize certain cultural practices 

expenditures and who, because of an erroneous 

computation, deducted a portion of such expenditures 

cannot be required to capitalize the amount 

claimed as expenses. (Sec. 162, ’86 Code.) 

Richard R. Wilbur, 43 T.C. 322, Acq., 1965-2 

C.B. 7. 

66.38 Custody and creation fees; sponsored 

investment plan. “Custody” fees paid by subscribers 

in a sponsored investment plan to the custodian 

of the plan for holding the shares of stock 

acquired, collecting and reinvesting cash dividends, 

etc., are deductible nonbusiness expenses. 

However, “creation” fees paid to the sponsor in 

developing, selling, and administering the plan in 

connection with acquisition of the stock area capital 

expenditure which must be added to the cost of 

the shares acquired. §§29.23(a)–15, 29.24-2. 

(Secs. 23(a), 24, ’39 Code; Secs. 162, 263, ’86 

Code.) 

Rev. Rul. 3, 1953-1 C.B. 37. 

66.39 Depositors’ guaranty fund; equalization 

payments. An equalization payment by a 

savings and loan association to a depositor’s guaranty 

fund as a condition of membership, and representing 

in substance an equity in the fund, is a nonamortizable 

capital expenditure. Withdrawals 

from the fund will be recognized as gain or loss 

measured by the difference between the amount of 

money received on withdrawal and the adjusted 

basis of the equity interest in the fund. §1.162-13. 

(Sec. 162, ’86 Code.) 

Rev. Rul. 72-379, 1972-2 C.B. 92. 

66.40 Development company maintenance 

assessments. Maintenance charges assessed 

against owners of residential property to provide 

municipal services and improvements are includable 

in the gross income of the development company 

and are not deductible as taxes by the property 

owners. No portion of the amount assessed is 

a capital expenditure. If an owner converts the 

property to rental property, such charges would be 

deductible business expenses. §§39.22(a)-1, 

39.23(a)-1. (Secs. 22(a), 23(a), ’39 Code; Secs 

61, 162, ’86 Code.) 

Rev. Rul. 55-154, 1955-1 C.B. 216. 

66.41 Dikes, seawalls, etc., to counteract land 

subsidence. Amounts expended for construction 

of seawalls, dikes, pumping facilities, etc., to 

counteract land subsidence arc capital expenditures 

and may be recovered through an allowance 

for depreciation over the useful life of the facilities, 

depending upon construction and the rate of 

subsidence to which they are subjected. However, 

repairs, maintenance, and moving costs occasioned 

by subsidence, are currently deductible 

business expenses. §§1.162-1, 1.167(a)-1, 

1.263(a)-1. (Sec. 162, 167, 263; ’86 Code.) 

Rev. Rul. 60-386, 1960-2 C.B. 107. 

66.42 Dredging and excavation costs. Costs of 

excavating water canals and dredging channels in 

harbors and slips are investments in tangible property 

and are depreciable if the asset is actually 

exhausting and the exhaustion is susceptible to 

measurement. Rev. Ruls. 66-71, 68–280, 68-483, 

69-78 modified, and 69–606 clarified. 

§1.167(a)-2. (Sec. 167, ’86 Code.) 

Rev. Rul. 75–137, 1975–1 C.B. 74. 

66.43 Dredging costs; harbor. Dredging costs 

incurred to deepen a portion of a harbor alongside 

a pier leading to a navigable channel which are for 

improvements to land rights are expenditures for

an intangible asset of a capital nature and are not 

depreciable when the useful life of such asset is not 

susceptible of measurement. Modified by Rev. 

Rul. 75-137. §1.167(a)-3. (Sec. 167, ’86 Code.) 

Rev. Rul. 66-71, 1966-1 C.B. 44. 

66.44 Earthen terraces. Taxpayer attempted to 

prevent soil erosion on the farms he had cultivated 

for many years by grading the land into earthen 

terraces. Held, the expenses of terracing were for 

maintenance and conservation, not for permanent 

improvements, and were deductible business 

expenses. (Secs. 23(a), 24(a), ’39 Code; Secs. 162, 

263, ’86 Code.) 

J. H. Collingwood, 20 T.C. 937, Acq., 1954-1 

C.B. 4. 

66.45 Environmental impact studies. A public 

utility company conducted, and paid another organization 

to conduct, environmental impact studies 

to support its application to state regulatory agencies 

to expand its generating facilities. The 

expenses are not research and experimental 

expenditures. However, if not chargeable to a capital 

account, the expenses are deductible business 

expenses. §1.162–1, 1.174–2. (Secs. 162, 174; 

’86 Code.) 

Rev. Rul. 80-245, 1980-2 C.B. 72. 

66.46 Equipment used for capital improvements. 

Depreciation sustained on construction 

equipment owned by a taxpayer and used in the 

erection of capital improvements for its own use 

is not an allowable deduction, but shall be added 

to and made a part of the cost of the capital 

improvements. So much thereof as is applicable to 

the cost of depreciable capital improvements is 

recoverable through deductions for depreciation 

over the useful life of such capital improvements. 

Clarified by Rev. Rul. 77-325. §§1.167(a)-1, 

1.263(a)-2. (Secs. 167, 263; ’86 Code.) 

Rev. Rul. 59–380, 1959-2 C.B. 87. 

66.47 Equipment used for capital improvements. 

Depreciation on equipment a public utility 

owns and uses in the construction of its own capital 

facilities must be capitalized under section 

263(a). §§1.167(a)–1, 1.263(a)-2. (Secs. 167, 

263; ’86 Code.) 

Idaho Power Co., 418 U.S. 1, Ct. D. 1965, 

1974-2 C.B. 85. 

66.48 Equipment used for capital improvements; 

accelerated depreciation. The depreciation 

capitalized and added to the cost of capital 

improvements in accordance with the holding in 

Rev. Rul. 59–380 is computed on the basis of the 

depreciation period and method used for tax purposes 

regardless of the period and method used for 

book purposes. Rev. Rul. 59-380 clarified. 

§§1.167(a)-1, 1.167(a)–11, 1.167(a)-12, 

1.263(a)-1. (Secs. 167, 263; ’86 Code.) 

Rev. Rul. 77-325, 1977-2 C.B. 67. 

66.49 Evaluation expenditures; acquisition of 

residential property for renovation and resale. 

Evaluation expenditures incurred by a domestic 

corporation in connection with the acquisition of 

existing residential property for renovation and 

resale are capital expenditures that must be taken 

into account as part of the cost of acquiring the 

property. However, if such expenditures do not 

result in the acquisition of property they are 

deductible as losses in the taxable year the corporation 

decides not to acquire the property. 

§§1.165-1, 1.263(a)-1. (Secs. 165, 263; ’86 

Code.) 

Rev. Rul. 74-104, 1974–1 C.B. 70. 

66.50 Excavation costs; water canal; utility 

company. Excavation costs of a water canal used 

as a conduit for circulating the water to cool an 

electric utility’s steam-plant condenser are capital 

expenditures for intangible assets that do not have 

a determinable useful life and hence are not subject 

to a depreciation allowance. Modified by Rev. 

Rul. 75-137. §1.167(a)-3. (Sec. 167, ’86 Code.) 

Rev. Rul. 69-78, 1969-1 C.B. 61. 

66.51 Expense of issuing bonds maturing 

serially. A proper proportion of the total expense 

of floating bonds that mature serially must be allocated 

to each series and each series then treated as 

a separate unit. The amortization deduction attributable 

to each series must be prorated equally over 

the life of the bonds constituting the series, however, 

if the bonds are retired before maturity, the 

deduction for that year should be increased by the 

amount which would ordinarily be deducted during 

the succeeding years for those particular 

bonds. I.T. 1412 superseded. §1.461-1. (Sec. 461, 

’86 Code.) 

Rev. Rul. 70-359, 1970-2 C.B. 103. 

66.52 Expense of securing loan evidenced by 

mortgage bond. Expenses incidental to securing 

a loan evidenced by a mortgage bond are not 

deductible in the year in which the loan is made but 

must be prorated over the life of the bond. S.M. 

3691 superseded. §§1.162-1, 1.461-1. (Secs. 162, 

461, ’86 Code.) 

Rev. Rul. 70-360, 1970-2 C.B. 103. 

66.53 Fee for lifetime use of hospital facilities; 

physician. A fee paid by physician to a hospital in 

exchange for a nontransferable lifetime privilege 

to use the hospital’s facilities is a capital expenditure 

recoverable by amortization deductions based 

on the physician’s life expectancy at the date of 

acquisition. Where it can be established that circumstances 

merit a shorter life, such shorter life 

should be utilized in computing the amortization 

deduction. §§1.162-1, 1.167(a)-3, 1.263(a)-1. 

(Secs. 162, 167, 263; ’86 Code.) 

Rev. Rul. 70-171, 1970-1 C.B. 55. 

66.54 Fee for maintenance of capital stock 

records. Fees paid, during the taxable year, to a 

registrar and transfer agent for the maintenance of 

capital stock records are deductible as business 

expenses except where the fees are incurred in 

connection with an original issue of stock, merger, 

consolidation, or stock dividend. I.T. 2582 superseded. 

§§1.162–1, 1.263(a)–1. (Secs. 162, 263; 

’86 Code.) 

Rev. Rul. 69-615, 1969-2 C.B. 26. 

66.55 Fee paid for preparation of an F.C.C. 

license application. An amount paid for the preparation 

of an F.C.C. application for a license to 

operate a radio system is a capital expenditure and 

not deductible as an expense under section 212, If 

the application is denied, the fee paid may be 

deductible at some future date as a loss under section 

165. §§1.165-1, 1.212-1, 1.263(a)-1, 

1.461-1. (Secs. 165, 212, 263, 461; ’86 Code.) 

Rev. Rul. 86-71, 1986-1 C.B. 102. 

66.56 Filling and grading real property. Taxpayer 

leased a building and property for his business, 

Construction on adjoining property blocked 

the leased property’s natural drainage causing 

water to puddle and seep into the building. Held, 

expenses of filling and grading the property were 

deductible repair expenses, not capital expenditures. 

(Sec. 23(a), ’39 Code; Sec. 162, ’86 Code.) 

Southern Ford Tractor Corp., 29 T.C. 833, Acq., 

1958-2 C.B. 7. 

66.57 Football player contracts. The cost of 

football player contracts owned or controlled by 

professional football teams, including amounts 

paid or incurred upon the purchase of a contract 

and bonuses paid to players, must be capitalized 

and depreciated over the useful life of the contract; 

accelerated methods of depreciation and investment 

credit are not allowable with respect to such 

contracts. A change from the current deduction of 

contract acquisition costs to the capitalization and 

depreciation of such costs is a change in method of 

accounting. Such contracts are assets described in 


section 1231(b) and recognized gains upon the 

sale or exchange are subject to the recapture provisions 

of section 1245. Trades of contracts are 

exchanges of like kind property. §§1.38–1, 

1.48-1, 1.167(a)-3, 1.263(a)-2, 1.446-1, 

1.481–1, 1.1031(a)–1, 1.1231–1, 1.1245–1. (Secs. 

38, 48,167, 263, 446, 481, 1031, 1231, 1245; ’86 

Code.) 

Rev. Rul. 71–137, 1971–1 C.B. 104. 

66.58 Franchises; acquired by payment of 

another’s debts. Amounts paid to creditors of an 

insolvent corporation by a new corporation, to 

obtain franchises to sell the creditors’ products, 

constitute capital expenditures. Such payments 

are considered to be made to establish good will. 

§39.24(a)-2. (Sec. 24(a), ’39 Code; Sec. 263, ’86 

Code.) 

Rev. Rul. 55-332, 1955–1 C.B. 320. 

66.59 Geological and geophysical exploration 

expenditures; mineral property. The tax treatment 

of geological and geophysical exploration 

expenditures, for the purpose of obtaining data 

that will serve as a basis for the acquisition or 

retention of a mineral property by a taxpayer 

engaged in exploring for minerals is discussed. 

I.T. 4006 superseded. Amplified by Rev. Rul. 

83-105. §§1.165-1, 1.263(a)-1, 1.614-1, 

1.615-1, 1.617-1. (Secs. 165, 263, 614, 615, 617; 

’86 Code.) 

Rev. Rul. 77-188, 1977–1 C.B. 76. 

66.60 Geological and geophysical exploration 

expenditures; mineral property. The tax treatment 

of geological and geophysical expenditures 

under Rev. Rul. 77–188 is explained in 7 factual 

situations. In addition to illustrating, by example, 

how the various geological and geophysical costs 

are to be allocated, what constitutes an abandonment 

as a potential source of mineral production 

is explained. Rev. Rul. 77-188 amplified. 

§§1.165-1, 1.263(a)-1. (Secs. 165, 263; ’86 

Code.) 

Rev. Rul. 83-105, 1983–2 C.B. 51. 

66.61 Geological exploration expenditures; 

COST well. An explanation is presented of the tax 

treatment of the expenses of drilling a Continental 

Offshore Stratigraphic Test (COST) well to obtain 

geological information on an offshore area to be 

used in determining whether to bid on leases for oil 

and gas drilling in the general area of the COST 

well. §§1.263(a)–1, 1.263(c)–1, 1.612–4. (Secs. 

263, 612; ’86 Code.) 

Rev. Rul. 80-342, 1980-2 C.B. 99. 

66.62 Golf greens. Expenditures incurred in the 

original construction of greens on a golf course 

constitute capital expenditures to be added to the 

original cost of the land and are not subject to 

depreciation. Subsequent operating expenses for 

sod, seed, soil and other maintenance constitute 

deductible business expenses. §39.24(a)–2. (Sec. 

24(a), ’39 Code; Sec. 263, ’86 Code.) 

Rev. Rul. 55-290, 1955-1 C.B. 320. 

66.63 Improvements on state highway; shopping 

center. Costs incurred for improvements 

made on a state-owned highway right-of-way to 

provide ingress and egress to a shopping center 

developed on leased land are capital expenditures 

amortizable over the term of the lease. 

§§1.162-11, 1.167(a)-1, 1.263(a)-1. (Secs. 162, 

167, 263; ’86 Code.) 

Rev. Rul. 68-607, 1968-2 C.B. 115. 

66.64 Improvements to docks; sheet piling. 

The cost of sheet-piles on the dock side of a slip to 

eliminate annual maintenance expenditures is a 

capital investment recoverable through annual 

depreciation over the useful life of the slip. (Sec. 

265, ’86 Code.) 

Rev. Rul. 57-30, 1957-2 C.B. 109. 

66.65 Industrial project; leasing arrangement. 

A corporation that enters into certain agree-


ments with a political subdivision of a State for the 

financing, construction, and operation of an industrial 

project is considered to be the owner of the 

project. The primary agreement is in the form of 

a lease of the project by the city to the corporation 

with an option to purchase. The political subdivision 

obtained funds to finance the purchase or 

construction of the project by issuing industrial 

development bonds. The corporation will take into 

account any premium or discount on the bonds. 

Other tax treatment resulting to the corporation is 

set forth. Amplified to provide that bond counsel 

fees, printing costs, and other related fees incurred 

by a corporation in the issuance of the bonds must 

be amortized over the life of the bonds. §§1.38-1, 

1.61-1, 1.61-12, 1.162-1, 1.163-1, 1.164-1, 

1.167(a)-1, 1.263(a)-1. (Secs. 38, 61, 162, 163, 

164, 167, 263; ’86 Code.) 

Rev. Rul. 68–590, 1968-2 C.B. 66; Rev. Rul. 

73-134, 1973-1 C.B. 60. 

66.66 Initiation fees; securties exchange. Initiation 

fees, paid only once and in addition to the 

annuel dues, received by a securities exchange 

from each new member for the use of the 

exchange’s services and facilities constitute gross 

income and not contributions to capital. The initiation 

fees are to be capitalized by the payers as part 

of the cost basis of their memberships. G.C.M. 

4015 revoked and Rev. Rul. 72–123 distinguished. 

§§1.61-1, 1.118-1, 1.162-1, 1.263(a)-1. (Secs. 

61, 118, 162, 263; ’86 Code.) 

Rev. Rul. 77-354, 1977–2 C.B. 50. 

66.67 Insurance; malpractice; reserve premiums; 

retrospective rate credit refund clause. 

Reserve premiums paid under a medical malpractice 

liability insurance policy that are subject to a 

retrospective rate credit refund clause are deductible 

in the year paid as business expenses. 

§§1.162–1, 1.263(a)-1, 1.461-1. (Secs. 162, 263, 

461; ’86 Code.) 

Rev. Rul. 83-66, 1983-1 C.B. 43. 

66.68 Insurance and storage costs; aging 

whiskey. Insurance and storage costs incurred 

during the aging process of whiskey purchased as 

an investment are capital expenditures to be 

treated as part of the acquisition costs of the whiskey. 

§§1.212–1, 1.263(a)-1, 1.1012-1. (Secs. 212, 

263, 1012; ’86 Code.) 

Rev. Rul. 70-356, 1970-2 C.B. 62. 

66.69 Insurance premiums; construction 

loan. Insurance premiums paid in connection with 

a construction loan for business improvements 

may, at the election of the taxpayer, be capitalized. 

Such an election is binding until the improvements 

covered by the loan are completed. §39.24(a)–6. 


Rev. Rul. 56-264, 1956-1 C.B. 153. 

66.70 Insurance premiums; protection during 

construction of new building. Insurance premiums 

for public liability and workman’s compensation 

insurance paid in connection with the 

construction of a taxpayer’s new building when 

the taxpayer takes on the responsibility of a general 

contractor are capital expenditures. These 

premiums are not deductible as a business 

expense. §§1.162–1, 1.263(a)–1. (Secs. 162, 263; 

’86 Code.) 

Rev. Rul. 66-373, 1966-2 C.B. 103. 

66.71 Intangible development costs; affiliated 

group; consolidated returns. Treatment of 

intangible development costs incurred by members 

of an affiliated group that files consolidated 

returns where only certain members have elected 

to deduct such expenses currently or there are 

intergroup transfers of operating properties and 

new acquisitions. I.T. 3763 superseded. 

§§1.612-4, 1.1502-17. (Secs. 612, 1502; ’86 

Code.) 

Rev. Rul. 69-590, 1969-2 C.B. 170. 

66.72 Intangible drilling and development 

costs (IDC); associated with property located 

outside the United States. IDC associated with 

productive wells located on foreign property, to 

the extent represented by physical property, must 

be recovered through depreciation by the taxpayer 

that has elected to capitalize the IDC under section 

263(i)(2)(A), Rev. Rul. 67–34 is obsoleted with 

respect to IDC after December 31, 1986. 

§§1.263(c)-1, 1.612-4. (Secs. 263, 612; ’86 

Code.) 

Rev. Rul. 87-134, 1987-2 C.B. 69. 


costs; carbon dioxide well. Carbon dioxide 

(CO2) produced from a well is subject to percentage 

depletion at the rate of 14 percent as a mineral 

described in the term “all other minerals” in section 

613(b)(7), The costs of drilling CO2 source 

wells to supply CO2 to be injected in certain oil 

fields are not subject to the option to expense 

intangible drilling and development costs. 

§§1.263(c)-1, 1.611-1, 1.612-4, 1.613-2, 

1.613A-1. (Secs. 263, 611, 612, 613, 613A; ’86 

Code.) 

Rev. Rul. 82-17, 1982-1 C.B. 95. 


costs; drilling to acquire arrangement. Only 

half of the intangible drilling and development 

costs of drilling the first well, paid by a taxpayer 

for an assignment of an undivided one-half of the 

oil and gas operating interest in the tract of land, 

is subject to the option to charge such costs to 

expense or to capital. §§1.263(c)–1, 1.612-4. 

(Secs. 263, 611, 612; ’86 Code.) 

Rev. Rul. 70-657, 1970-2 C.B. 70. 


costs; election. Section 263, as amended by the 

Energy Tax Act of 1978 to grant an option to 

deduct intangible drilling and development costs 

incurred with respect to geothermal wells, does 

not permit a new election for the treatment of such 

costs for oil and gas wells. §§1.263(c)–1, 1.612-4. 

(Secs. 263, 612; ’86 Code.) 

Rev. Rul. 80-2, 1980-1 C.B. 61. 


costs; exploratory holes. Costs incurred to drill 

expendable holes to determine the location and 

delineation of offshore hydrocarbon deposits and 

capable of conducting hydrocarbons to the surface 

on completion are within the option to expense 

intangible drilling and development costs (IDC) 

provided by section 263(c), regardless of whether 

there is an intent to produce hydrocarbons. 

§§1.263(a)-1, 1.612-4. (Secs. 263, 612; ’86 

Code.) 

Rev. Rul. 88-10, 1988-1 C.B. 112. 


costs; geothermal steam wells. For taxable years 

1960 through 1962, geothermal steam wells were 

gas wells for purposes of the percentage depletion 

allowance and the deduction for intangible drilling 

a costs. (Secs. 263, 611, 613; ’86 Code.) 

Arthur E. Reich, 52 T.C. 700, Nonacq. 1979-1 

C.B. 2. 


costs; offshore platforms. Costs, including 

expenditures for engineering and design specifications, 

incurred to acquire offshore platforms 

through contracts with builders in connection with 

oil and gas properties are to be capitalized and 

recovered through depreciation. However, costs to 

transport the platform in its component form, performed 

under separate contract, including specifications 

relating thereto, and costs to set the platform 

in position at the site may be capitalized or 

expensed. §§1.263(c)–1, 1.612–4. (Secs. 263, 

612; ’86 Code.) 

Rev. Rul. 70-596, 1970-2 C.B. 68. 


costs; offshore platforms. Guidance is provided 

regarding which costs incurred in the course of 

fabricating, transporting and installing an offshore 

oil and gas drilling and production platform and 

the related facilities and equipment are within the 

option to expense intangible drilling and development 

costs provided by section 263(c) of the Code. 

§§1.263(c)-1, 1.612-4. (Secs. 263, 612; ’86 

Code.) 

Rev. Rul. 89-56, 1989-1 C.B. 83. 


costs; operating interest. The proper treatment is 

shown for an arrangement under which, in consideration 

for drilling an oil and gas well at a designated 

location on a leased tract of land, the driller 

receives from the lessee of the land an assignment 

of the entire working interest in the drill site and 

an undivided fraction of the working interest in the 

remainder of the tract. §§1.61–2, 1.263(c)-1, 

1.451-1, 1.612-4, 1.614-1, 1.1001-1, 

301.7805-1. (Secs. 61, 263, 451, 612, 614, 1001, 

7805; ’86 Code.) 

Rev. Rul. 77-176, 1977-1 C.B. 77. 


costs; operating interest; capital or expense. 

The intangible drilling and development costs that 

arc subject to an option to charge to capital or 

expense are limited to those that are attributable to 

a fractional share of the operating interest that the 

carrying party received as his “permanent” interest 

upon the exercise of an option by the carried 

party to convert a retained overriding royalty into 

50 percent of operating interest when cumulated 

gross production from an oil and gas well equalled 

a specified amount. The remainder of such costs, 

including the depreciable equipment furnished, is 

attributable to the fraction of the operating interest 

held by the carried party upon his exercise of the 

option, and must be capitalized by the carrying 

party as the depletable capital cost of the interest 

acquired. §1.612–4. (Sec. 612, ’86 Code.) 

Rev. Rul. 70-336, 1970-1 C.B. 145. 


costs; operating interest; capital or expense. A 

taxpayer agreed to drill and operate oil wells on 

each of two noncontiguous tracts in exchange for 

the entire operating interest in each tract until the 

aggregate gross income from both tracts equaled 

the cost of developing and operating both tracts 

and a 75% operating interest in each tract thereafter. 

The taxpayer’s deduction for intangible drilling 

and development costs is limited to the portion 

of those costs attributable to the 75% 

operating interest in each tract. Rev. Rul. 70–336 

modified. §§1.263(c)-1, 1.612-4, 1.614-1, 

301.7805-1. (Secs. 263, 612, 614, 7805; ’86 

Code.) 

Rev. Rul. 80-109, 1980-1 C.B. 129. 



carrying party who drills, completes, equips, and 

operates the first well in return for the entire operating 

interest in an oil and gas lease, until he 

recoups one-half of such costs, and thereafter 

owns an undivided one-fourth operating interest 

may only deduct one-fourth of the intangible drilling 

and development costs provided he makes a 

proper election. The remaining three-fourths of 

such costs must be capitalized and included in his 

basis in the lease, recoverable through depletion. 

§§1.263(c)-1, 1.611-1, 1.612-4. (Secs. 263, 611, 

612; ’86 Code.) 

Rev. Rul. 71-206, 1971-1 C.B. 105. 



carrying party who drills, completes, equips, and 

operates an oil and gas well in return for the entire 

operating interest in the lease during the period of 

complete recoupment (payout) of such costs, and 

thereafter owns an undivided one-half operating

interest may deduct all the intangible drilling and 

development costs provided he makes a proper 

election. At the end of the complete payout period 

he must capitalize 50 percent of the remaining 

undepreciated basis of lease and well equipment, 

if any, as the depletable leasehold acquisition costs 

of the operating interest acquired. §1.612–4. (Sec. 

612, ’86 Code.) 

Rev. Rul. 71-207, 1971-1 C.B. 160. 



carrying party who drills and completes an oil and 

gas well in return for the entire working interest in 

the lease until 200 percent of the drilling and 

development plus the equipment and operating 

costs necessary to produce that amount are 

recouped, and after such recoupment relinquishes 

all rights in the interest to the lessee, is the owner 

of all the working interest during the complete 

pay-out period and may exercise the option to 

deduct all intangible drilling and development 

costs. §§1.263(c)-1, 1.612–4. (Secs. 263, 612; ’86 

Code.) 

Rev. Rul. 75-446, 1975-2 C.B. 95. 


costs; operating interest; investment allocation. 

A taxpayer’s investment in an oil and gas 

venture under a contract designating a dollar 

amount as intangible drilling and development 

costs is deductible pursuant to an election under 

section 263(c) only to the extent that such costs 

would have been incurred in an arms-length transaction 

with an unrelated drilling contractor. The 

remainder of the total investment is the basis of the 

taxpayer’s working interest. §§1.263(c)–1, 

1.612-4. (Secs. 263, 612; ’86 Code.) 

Rev. Rul. 73–211, 1973–1 C.B. 303. 


costs; properties outside U.S. A domestic corporation 

that, under its agreement with a foreign 

country, furnishes all the funds for exploration, 

development, and production of gas and oil within 

designated areas of the country, is required to sell 

all of its production to that country at the competitive 

world market price, and, except for a provision 

for a cash settlement if the foreign country terminates 

the agreement, must recover its 

investment solely from production, is entitled to a 

depletion allowance and may exercise the option 

to capitalize or deduct its intangible drilling and 

development costs. §§1.263(c)-1, 1.612-4. (Secs. 

263, 612; ’86 Code) 

Rev. Rul. 73-470, 1973-2 C.B. 88. 


costs; properties outside U.S. A taxpayer who 

holds the working or operating interest in oil and 

gas properties located outside the U.S. has the 

option to capitalize or expense the intangible drilling 

and development costs incurred with respect 

to those properties if he is required to report the 

income therefrom. §§1.263(c)–1, 1.612-4. (Secs. 

263, 612; ’86 Code.) 

Rev. Rul. 67-34, 1967-1 C.B. 72. 


costs; recoupment; partly owned interests. 

Intangible drilling and development costs 

incurred by a taxpayer in drilling an oil and gas 

well under an agreement with the owner of oil and 

gas rights in a lease to receive an undivided part 

interest therein after completion of the well and to 

receive the entire operating interest income until 

recoupment (pay-out) of all such expenditures, are 

fully allowable as a deduction provided the proper 

election is made under reg. 1.612-4. No portion of 

such costs is required to be capitalized as deplet 

able leasehold acquisition costs. However, at payout, 

a portion of the undepreciated basis in the tangible 

equipment must be capitalized as deplet able 

leasehold acquisition costs. §§1.263(c)-1, 

1.612-4. (Secs. 263, 612; ’86 Code.) 

Rev. Rul. 69–332, 1969–1 C.B. 87. 


costs; “turnkey” agreements. An individual 

who acquired an interest in an oil and gas lease 

from the original lessee well driller, under an 

agreement that required no payment for dry holes 

but payment of a specified amount to the driller at 

the completion of each of a stated number of wells 

that were completed as producers, has made capital 

expenditures that are not intangible drilling and 

development costs. §§1.263(c)–1, 1.612–4. (Secs. 

263, 612; ’86 Code.) 

Rev. Rul. 75-304, 1975-2 C.B. 94. 


costs; water injection wells. Certain casts 

incurred by a taxpayer in the drilling of water 

injection wells necessary in the primary development 

of the oil property are “intangible drilling 

and development costs” and may, at the tax payer’s 

option, be chargeable to capital or to expense. 

§§1.263(c)-1, 1.612-4. (Secs. 263, 612; ’86 

Code.) 

Rev. Rul. 69-583, 1969-2 C.B. 41. 

66.92 Interest equalization tax; imposed retroactively. 

The interest equalization tax retroactively 

imposed on the acquisition of foreign stock 

and paid in a subsequent year is required to be 

capitalized and treated as part of the cost of the 

stock. (Secs. 263, 4911; ’86 Code.) 

Rev. Rul. 68-628, 1968-2 C.B. 117. 

66.93 Interest equalization tax; insurance 

companies. Interest equalization taxes paid by life 

and mutual insurance companies upon the acquisition 

of notes purchased at par from a foreign corporation 

qualify as amortizable bond premium. 

Interest equalization taxes that are reimbursed by 

the borrower are deductible as business expenses 

to the extent the reimbursements are included in 

gross income. This deduction must, however, be 

reduced by the amount of the adjustment for interest 

equalization tax that qualified as amortizable 

bond premium. §§1.171-1, 1.263(a)-1, 1.818-3, 

1.818-7, 1.822-8, 1.822-10. (Secs. 171, 263, 818, 

822; ’86 Code.) 

Rev. Rul. 68-85, 1968-1 C.B. 97. 

66.94 Investment property; interest and real 

property taxes. Accounting fees and general 

office costs incurred by a corporation whose sole 

activity is an investment in unimproved, non-income-producing 

real property are deductible 

under Section 162; interest and real property taxes 

incurred by the corporation may be deducted 

under section 163 and 164, respectively. 

§§1.162-1, 1.163-1, 1.164-1, 1.266-1. (Secs. 

162, 163, 164, 266; ’86 Code.) 

Rev. Rul. 78-195, 1978-1 C.B. 39. 

66.95 Land clearing expenditures; arid land 

converted into farm land. A taxpayer in the business 

of farming who with others undertook, under 

the Desert Land Act, the conversion of arid public 

land into land suitable for farming may deduct, 

under section 182(a), his pro rata share of costs for 

land levelling and clearing and for nondepreciable 

canal construction. However, the irrigation system 

with a pumping plant, penstocks, depreciable 

canals, steel mainlines, and portable sprinkler 

Iincs arc tangible assets subject to section 167, and 

expenditures incurred in perfecting land title are 

includable in the cost basis of the land. 

§§1.167(a)-2, 1.182-3, 1.263(a)-1. (Secs. 167, 

182, 263; ’86 Code.) 

Rev. Rul. 75-151, 1975-1 C.B. 88. 

66.96 Land improvement and construction; 

loan interest. A taxpayer who borrowed funds for 

land improvement and plant construction may 

elect to capitalize the loan interest for the current 

and subsequent taxable years even though he 


deducted such interest for the prior year, 

§1.266-1, (Sec. 266, ’86 Code.) 

Rev. Rul. 72-594, 1972-2 C.B. 199. 

66.97 Land preparation costs; electric and 

gas distribution systems. Amounts paid by the 

developer of a mobile home park to a public utility 

for underground electric and gas distribution systems 

are capital expenditures that are included in 

the developer’s cost basis of the land. Examples 

illustrate which land preparation costs may be 

depreciated by the developer and which must be 

included in the basis of the land. §§1.167(a)–2, 

1.263(a)-1. (Secs. 167, 263; ’86 Code.) 

Rev. Rul. 80-93, 1980-1 C.B. 50. 

66.98 Landfill; revetments and berm. The 

costs incurred in construction of steel cellular 

revetments and a stable slope berm outward from 

a lake shoreline, as part of a project to enclose and 

fill in an area of the lake to provide additional land 

for industrial facilities, and the costs of filling in 

the inclosed area are nondepreciable land acquisition 

costs. §§1.167(a)–2, 1.263(a)–1. (Secs. 167, 

263; ’86 Code.) 

Rev. Rul. 77-270, 1977-2 C.B. 79. 

66.99 Lease; cancellation payment. An 

amount paid by the lessor to cancel a warehouse 

lease to secure the warehouse for his own use is a 

capital expenditure amortizable over the lease’s 

unexpired term. The lessor’s subsequent lease of 

the warehouse to another lessee does not affect the 

period over which the cancellation payment is 

amortized. O.D. 397 superseded. §1.263(a)–1. 

(Sec. 263, ’86 Code.) 

Rev. Rul. 71-283, 1971-2 C.B. 168. 

66.100 Lease; modification; additional 

“rental” payments. Additional “rental” payments 

made over a part of the lease term, in accordance 

with a lease modification agreement, are 

capital expenditures amortizable over the full term 

of the lease. §§1.162–1, 1.263(a)–1. (Secs. 162, 

263; ’86 Code.) 

Rev. Rul. 73-176, 1973-1 C.B. 146. 

66.101 Leases; automotive equipment. Taxpayer 

leased automotive equipment from a bank 

under a trust agreement providing for rental payments 

equal to the costs incurred by the bank in 

acquiring titled, interest and incidental expenses. 

The bank held only bare legal title and the taxpayer 

was virtual owner of the vehicles and 

entitled to depreciate the cost, which included the 

rental pay ments, over the life of the equipment, 

rather than over the “lease” period. The “rental” 

payments constituted part payments for capital 

items and should be capitalized insofar as they 

represent capital payments. §§39.23(a)-10, 

39.23(1)-1, 39.24(a)-2. (Secs. 23(a), 23(1), 24(a), 

’39 Code; Secs. 162, 167, 263, ’86 Code.) 

Rev. Rul. 55-25, 1955-1 C.B. 283. 

66.102 Leases; oil and gas; acquisition fees. A 

taxpayer must capitalize as leasehold acquisition 

costs both money paid to a filing service company 

to file applications to lease Federal lands under 

noncompetitive simultaneous offer procedure and 

an additional amount paid for an option to sell an 

interest in any leases acquired with a concurrent 

guarantee by the company that if no leases are so 

acquired it will assign a lease and buy it back. If a 

lease is assigned and repurchased by the filing service 

company, the taxpayer’s loss, subject to treatment 

under section 1231(a), is the difference 

between the total amount paid to the company and 

the amount received on the repurchase. Modified 

by Rev. Rul. 80-176. §1.263(a)-1. (Sec. 263, ’86 

Code.) 

Rev. Rul. 77-395, 1977-2 C.B. 80. 

66.103 Leases; oil and gas; acquisition fees. 

Fees paid for services rendered in connection with 

the acquisition of noncompetitive government oil 

and gas leases must be capitalized by the applicant 

as part of the cost of acquisition of the leases


acquired and may be recoverable through depletion. 

Distinguished by Rev. Rul. 71–191. 

§1.611-1. (Sec. 611, ’86 Code.) 

Rev. Rul. 67-141, 1967-1 C.B. 153. 

66.104 Leases oil and gas; acquisitions; 

attempted negotiations. Geologists involved in 

the acquisition and disposition of oil and gas 

leases, obtained leases from some of the landowners 

within two large areas, but were unable to 

secure leases from others. Held, the costs allocable 

to the unsuccessful negotiations were deductible 

as losses incurred in transactions entered into for 

profit and not required to be capitalized and added 

to the basis of the leases acquired. (Secs. 165, 263; 

’86 Code.) 

Vincent T. Larsen, 66 T.C. 478, Acq., 1977-1 

C.B. 1. 

66.105 Legal and accounting expenses; registration 

of stock with S.E.C. Legal and accounting 

expenditures incurred by a corporation in registering 

its stock with the Securities and Exchange 

Commission constitute capital expenditures and, 

as such, are not deductible as business expenses. 

I.T. 3026 superseded. §§1.162-1, 1.263(a)-1. 

(Secs. 162, 263; ’86 Code.) 

Rev. Rul. 69-330, 1969–1 C.B. 51. 

66.106 Legal and accounting expenses; 

research project. The expenses for legal and 

accounting work incurred by a taxpayer in applying 

for a Federal income tax ruling in connection 

with a research and development project and a 

determination of a regulatory commission with 

respect to the effect of the project on the taxpayer’s 

rate structure are not deductible as research and 

experimental expenditures. The expenses, if not 

chargeable to capital account, are deductible business 

expenses. §§1.162–1, 1.174-2. (Secs. 162, 

174; ’86 Code.) 

Rev. Rul. 67-401, 1967-2 C.B. 123. 

66.107 Legal expenses; quiet title and 

accounting. Legal expenses incurred in a suit to 

quiet tide to mineral property and obtain an 

accounting for profits from the extraction and sale 

of oil by an trespasser were allocable, half to the 

collection of income and half to the quieting of 

title. (Sec. 23(a), ’39 Code; Sec. 212, ’86 Code.) 

Thomas E. Arnett, 31 T.C. 320, Acq., 1959-1 

C.B. 3. 

66.108 Legal expenses; settlement of suit to 

recover property. Under an agreement to compromise 

litigation between the taxpayer and her 

former husband, community property was sold 

and the taxpayer received half the proceeds which 

included gain. Held, only a portion of legal 

expenses was allocable to her recovered basis, the 

remainder was allocable to the recovery of her 

share of the gain and was a deductible expense. 


Agnes Pyne Coke, 17 T.C. 403, Nonacq. 1973-1 

C.B. 2. 

66.109 Legal expenses; suits involving business 

real property. Legal expenditures in curred 

in the successful prosecution of a suit to invalidate 

a municipal ordinance prohibiting the operation of 

taxpayer’s business are deductible business 

expenses. However, expenditures incumed, after 

the denial of a building permit to expand taxpayer’s 

business, in the successful prosecution of a 

suit to invalidate an ordinance prohibiting such 

expansion, or incurred in the unsuccessful challenge 

of a municipally established building line 

that adversely affected taxpayer’s business property, 

are nondeductible capital expenditures. I.T. 

1382 and Rev. Rul. 60–261 superseded. 

§§1.162-1, 1.263(a)-2. (Secs. 162, 263; ’86 

Code.) 

Rev. Rul. 78-389, 1978-2 C.B. 125. 

66.110 Legal expenses; tax advice on reorganization. 

Legal fees incurred by a corporation in 

securing advice on the tax consequences prior to 

the consummation of a merger with another corporation, 

a subsequent stock split, and proposed distribution 

in redemption of a portion of the outstanding 

stock are capital in nature and not 

deductible. However, in the event the proposed 

redemption is subsequently abandoned, the 

capitalized fees are deductible in the taxable year 

of abandonment. §§1.162–1, 1.263(a)–1. (Secs. 

162, 263; ’86 Code.) 

Rev. Rul, 67–125, 1967-1 C.B. 31. 

66.111 Legal expenses to invalidate trust. Litigation 

expenses paid or incurred in a suit to have 

a residuary trust declared void are capital expenditures 

incurred in defending title to property. 

§39.23(a)-15. (Sec. 23(a), ’39 Code; Sec. 212, ’86 

Code.) 

Rev. Rul. 55-221, 1955-1 C.B. 275. 

66.112 Legal fees; concursus and declaratory 

judgment suits. Taxpayer deducted legal fees 

incurred in two court proceedings, one a declaratory 

judgment action in which taxpayer’s title to 

an overriding royalty interest was in dispute, and 

the other involving a claim to overriding royalty 

payments deposited in a local court. Held, only the 

portion allocable to the declaratory judgment was 

a nondeductible capital expenditure in the defense 

of title; the portion allocable to collecting accumulated 

royalties was a deductible expense to recover 

ordinary income. (Secs. 212, 263; ’86 Code.) 

Vincent Boagni, Jr., 59 T.C. 708, Acq., 1973-2 

C.B. 1. 

66.113 Liquefied petroleum gas; injected into 

hydrocarbon reservoir. Costs incurred for purchased 

liquefied petroleum gas injected into a 

hydrocarbon reservoir to increase recovery of 

native oil, to the extent not recoverable with subsequent 

production, are deductible in the year such 

losses can be determined; the remaining costs 

must be allocated and offset against sale proceeds. 

Modified to provide that the costs incurred after 

November 5, 1973, for such unrecoverable gas are 

capital expenditures subject to depreciation. However, 

the undepreciated portion of such gas is 

deductible as a loss in the year it can be determined 

that the remaining gas did not benefit production 

and the project is a failure. §§1.162–1, 1.165–1, 

1.167(a)-1, 1.263(a)-1, 301.7805-1. (Secs. 162, 

165,167, 263, 7805; ’86 Code.) 

Rev. Rul. 70-354, 1970-2 C.B. 50; Rev. Rul. 

73-469, 1973-2 C.B. 84. 

66.114 Literary works. Taxpayer, not engaged 

in the trade or business of writing, wrote and had 

published a manuscript of a literary composition. 

Held, expenses for secretarial help, etc., must be 

capitalized, and the total of such expenses is the 

taxpayer’s basis of the property. Income in excess 

of such basis must be reported as ordinary income. 

The amount paid the publisher as an inducement 

to publish the manuscript in book form must also 

be capitalized and allocated among the total number 

of copies published in the first edition. 

§§1.212-1, 1.263(a)-1, 1.1001-1, 1.1011-1, 

1.1012-1, 1.1221-1. (Secs. 212, 263, 1001, l011, 

1012, 1221; ’86 Code.) 

Rev. Rul. 68-194. 1968-1 C.B. 87. 

66.115 Litigation expenses; legal fees and 

settlement payment; stock title and negligence 

claim. Taxpayer paid a money settlement in a lawsuit 

involving the former employer’s claim to 

reacquire shares of stock and the employer’s 

threatened action against the taxpayer for negligent 

performance of his duties. Held, only a portion 

of the payment represented a charge against 

the capital gain which taxpayer realized upon sale 

of the stock; a portion of the payment was related 

to the threatened negligence claim and was 

deductible as a business expense. (Secs. 162, 263; 

’86 Code.) 

George Eisler, 59 T.C. 634, Acq., 1973-2 C.B. 

1. 

66.116 Litigation expenses; stock appraisal; 

reorganization matters. The “primary purpose” 

test developed in cases involving costs of defending 

property has no application to litigation 

expenses incurred to establish the value of stock 

required to be purchased from dissenting minority 

shareholders in reorganization matters. 

§§1.162-1, 1.212-1, 1.263(a)-2. (Secs. 162, 212, 

263; ’86 Code.) 

Woodward, 397 U.S. 572, Ct. D. 1939, 1970-1 

C.B. 56; Hilton Hotels Corp., 397 U.S. 580, Ct. D. 

1940, 1970-1 C.B. 59. 

66.117 Livestock; sale of investment property. 

A corporation “sells” animals to investors 

for nonrecourse notes and contracts to raise and 

breed the animals for an annual fee. The corporation 

guarantees to purchase any offspring for a 

specified price and guarantees to repurchase at a 

specified price after five years the animals originally 

sold to the investors. The original transaction 

is not a sale for federal income tax purposes, and 

the corporation remains owner of the animals during 

the contractual period. The investors are not 

entitled to depreciation or investment credit with 

respect to the animals, and the corporation must 

capitalize the cost of the animals. §§1.48–1, 

1.61-4, 1.162-12, 1.167(a)-1. (Secs. 48, 61, 162, 

167; ’86 Code.) 

Rev. Rul. 78-411, 1978-2 C.B. 112. 

66.118 Management fee; start-up expenditures; 

construction of offshore drilling rig. A 

cash-method, calendar-year limited partnership 

was organized in 1980 to acquire an offshore drilling 

rig to be constructed for it and to engage in 

contract drilling after the rig is completed in July, 

1981. The portion of a management fee paid to the 

managing partner for supervision of construction 

and financing of the rig is a capital expenditure. 

The portion of the fee attributable to the management 

of the partnership during the construction of 

the rig must also be capitalized, but that part of this 

amount paid or incurred after July 29, 1980, is a 

start-up expenditure, which the partnership may 

elect to deduct under section 195 of the Code. 

§§1.162-1, 1.263(a)-1. (Secs. 162, 195, 263; ’86 

Code.) 

Rev. Rul. 81-150, 1981–1 C.B. 119. 

66.119 Master recordings. The costs of master 

recordings used for substantially more than one 

year to produce phonograph records must be 

capitalized and recovered through depreciation. 

§§1.167(a)-1, 1.263(a)-1. (Secs. 167, 263; ’86 

Code.) 

Rev. Rul. 69-475, 1969–2 C.B. 40. 

66.120 Medical; air conditioner. To the extent 

it increased the value of his home, taxpayer was 

required to capitalize the cost of a central air 

conditioning unit recommended by a physician 

but the excess of such cost was deductible as a 

medical expense. (Sec. 263, ’86 Code.) 

Raymond Gerard, 37 T.C. 826, Acq. 1966-1 

C.B. 2. 

66.121 Mining; acquisition of adjacent land 

for dumping area. The cost of a tract of land containing 

an exhausted open-pit mine, purchased for 

use as a dumping area for overburden removed 

from an adjacent strip mine at a price greater than 

the going price of similar tracts containing no 

open-pit mine, is not deductible as a development 

expenditure. The entire cost must be capitalized, 

but the portion attributable to the exhausted openpit 

mine is an expenditure for an asset that is depreciable 

over its useful life based on the capacity of 

the open pit and the rate of dumping overburden 

into it. §§1.167(a)–1, 1.616–1. (Secs. 167, 616; 

’86 Code.) 

Rev. Rul. 74–282, 1974-1 C.B. 150.

66.122 Mining; rights to adjacent lands. Costs 

incurred for the acquisition of stripping rights to 

surface lands adjoining producing properties of 

the taxpayer, the right to mine copper from 

beneath those lands, the right to dump waste on 

certain other lands, and various other rights, are 

capital expenditures incurred for the acquisition of 

additional rights, to be recovered through depletion 

and not deductible as development ex penditures. 

Kennecott Copper Corp. decision not followed. 

§1.616-1. (Sec. 616, ’86 Code.) 

Rev. Rul. 67–35, 1967-1 C.B. 159. 

66.123 Mining; road construction. Expenditures 

for the construction of a road solely for transport 

of equipment and supplies from the nearest 

seaport shipping point to an inaccessible mining 

area are not mine development expenditures. The 

expenditures are recoverable by depreciation or 

amortization over a period not to exceed the term 

of a mining concession under an agreement with 

a foreign government. §§1.167(a)–2, 1.616–1. 

(Secs. 167, 616; ’86 Code.) 

Rev. Rul. 73-488, 1973-2 C.B. 207. 

66.124 Mortgage acquisition costs. Finders 

fees (buying commissions) paid to brokers, title 

companies, and other third parties by banks in connection 

with the placement of mortgage loans 

constitute a part of the mortgage acquisition cost 

to be capitalized and amortized over the lives of 

the applicable mortgage loans. §39.113(b)(1)-4. 

(Sec. 113(b), ’39 Code; Sec. 1016, ’86 Code.) 

Rev. Rul. 57-400, 1957–2 C.B. 520. 

66.125 Nuclear fuel elements. The purchase 

costs of nuclear fuel elements used to power 

nuclear reactor plants generating electricity are 

capital expenditures subject to depreciation. The 

useful lives and salvage values of the fuel elements 

are questions of fact. Clarified concerning 

the terminology used for the nuclear fuel assemblies. 

§§1.167(a)-1, 1.263(a)-2. (Secs. 167, 263; 

’86 Code.) 

Rev. Rul. 72–507, 1972–2 C.B. 198; Rev. Rul. 

74-237, 1974-1 C.B. 7. 

66.126 Office equipment; member of congress; 

purchase with personal funds. Amounts 

paid by a member of congress from his personal 

funds, in excess of his annual Congressional 

allowance, for reasonable salaries of additional 

staff employees necessary to handle an unusually 

heavy workload are deductible as business 

expenses incurred as an employee. However, 

amounts he paid for additional office equipment 

under such circumstances are capital expenditures 

subject to depreciation. A net loss incurred in the 

operation of the member’s office because of heavy 

initial expenses will not preclude deduction of the 

full amount of his business expenses. O.D. 310 

superseded. §§1.167(a)-1, 1.163(a)–2. (Secs. 

167, 263; ’86 Code.) 

Rev. Rul. 73-464, 1973-2 C.B. 35. 

66.127 Oil and gas leases; acquisition fees. An 

explanation is provided of the tax treatment of (1) 

fees paid to a corporation that provides expert geological 

advice and files applications to acquire 

noncompetitive federal oil and gas leases, (2) fees 

paid for an option to sell an interest in any leases 

acquired, and (3) fees allocable to the corporation’s 

practice of offering to purchase a specified 

fractional interest in acquired leases. Rev. Rul. 

77-395 modified and clarified; Rev. Rul. 71-191 

distinguished. §§1.165-1, 1.263(a)–1, 

301.7805-1. (Secs. 165, 263, 7805; ’86 Code.) 

Rev. Rul. 80-176, 1980-2 C.B. 97. 

66.128 Oil and gas leases; acquisition fees; 

5-year program. A fee paid by an investor to participate 

in a five-year program to acquire federal 

oil and gas leases is a capital expenditure includable 

in the basis of any leases acquired. Furthermore, 

since an investor who does not acquire any 

leases during the five-year term of the program 

receives a refund of the fee paid, the investor has 

not sustained any uncompensated loss within the 

meaning of section 165(a). §1.165–1. (Sec. 165, 

’86 Code.) 

Rev. Rul. 83-137, 1983-2 C.B. 41. 

66.129 Oil and gas properties; installation of 

production facilities. Capital expenditures 

incurred in installing certain facilities for the production 

of oil and gas are not intangible drilling 

and development costs subject to the option provided 

by reg. 1.612-4. Such expenditures are 

recoverable only through depreciation allowances. 

Mim. 6754 superseded. §§1.263(c)-1, 

1.612-4. (Secs. 263, 612; ’86 Code.) 

Rev. Rul. 70-414, 1970-2 C.B. 132. 

66.130 Oil and gas properties; underground 

storage; drilling costs. The cost of drilling wells 

to adapt a subsurface aquifer formation for use as 

a natural gas storage reservoir are capital expenditures 

recoverable through depreciation. 

§§1.167(a)-2, 1.263(a)-1, 1.612-4. (Secs. 167, 

263, 612; ’86 Code.) 

Rev. Rul. 75–235, 1975-1 C.B. 97. 

66.131 Oil and gas properties; underground 

storage; easements. The costs of easements, surveys, 

engineering studies, testing, property damage, 

and rights to use a subsurface aquifer reservoir 

for gas storage purposes are capital 

expenditures recoverable through depreciation, 

§§1.167(a)-3, 1.263(a)-1. (Secs. 167, 263; ’86 

Code.) 

Rev. Rul. 75-234, 1975–1 C.B. 96. 

66.132 Oil and gas properties; under ground 

storage; unrecoverable gas. The cost of natural 

gas injected into an underground aquifer reservoir 

and determined to be unrecoverable is a capital 

expenditure recoverable through depreciation. 

§§1.167(a)-1, 1.263(a)-1. (Secs. 167, 263; ’86 

Code.) 

Rev. Rul. 75–233, 1975-1 C.B. 95. 

66.133 “On sale” liquor license; California. 

The amount paid by a taxpayer as consideration 

for the assignment of a license to engage in the “on 

sale” liquor business in California is a capital 

investment that must be carried on his books as a 

capital asset until such time as the license is again 

transferred or terminated. A deduction for 

depreciation or obsolescence is not allowable. I.T. 

3873 superseded. §§1.263(a)-1, 1.1221-1. (Secs. 

263, 1221; ’86 Code.) 

Rev. Rul. 70-248, 1970-1 C.B. 172. 

66.134 Organization expenditures. Organizational 

expenditures which a taxpayer properly 

elects to amortize and deduct currently may be so 

deducted even though such expenditures are 

reflected on the taxpayer’s books as capital expenditures. 

§1.248-1. (Sec. 248, ’86 Code.) 

Rev. Rul. 67–15, 1967–1 C.B. 71. 

66.135 Organization expenditures; partnership; 

payment to partner. A limited partnership’s 

payments to one of its general partners for 

services he rendered in organizing the partnership 

are payments described in section 707, constitute 

capital expenditures under section 263, and are not 

deductible under section 162. §§1.162-1, 

1.263(a)-1, 1.707-1. (Secs. 162, 263, 707; ’86 

Code.) 

Rev. Rul. 75–214, 1975–1 C.B. 185. 


66.136 Out of court settlement; actual and 

threatened claims; acquisition of stock. The 

entire amount of an out-of-court payment made by 

an individual, a shareholder and director of a 

domestic corporation, in settlement of both an 

actual claim against the individual under section 

10(b) of the Securities Exchange Act of 1934 and 

various threatened claims, all relating to the individual’s 

acquisition of the stock of the corporation, 

is a capital expenditure, not a business 

expense deductible under section 162(a) of the 

Code. §§1.162-1, 1.263(a)-1. (Secs. 162, 263; ’86 

Code.) 

Rev. Rul. 80-l19, 1980–1 C.B. 40. 

66.137 Passenger automobiles; section 179 

deduction. Guidance is provided to taxpayers 

who made elections under section 179, to expense 

amounts that exceed the dollar limitations 

imposed by section 280F(a)(2). §1.280F-2T. (Sec. 

601.602, S.P.R.; Secs. 179, 280F, ’86 Code.) 

Rev. Proc. 86-48, 1986–2 C.B. 745. 

66.138 Payments for surrender of bonds. 

Amounts paid directly to a bondholder by the corporation’s 

shareholders in a consideration of the 

surrender of bonds to the corporation are capital 

investments increasing the basis of the stock and 

are not allowable deductions in determining the 

taxpayer’s income. S.M. 2611 superseded. 

§1.263(a)-1. (Sec. 263, ’86 Code.) 

Rev. Rul. 69–64, 1969–1 C.B. 85. 

66.139 Pennsylvania bonus required of foreign 

corporations. The bonus previously 

required by Pennsylvania to be paid by a foreign 

organization on capital actually employed in that 

State does not constitute an allowable deduction 

during such time as the organization remains in 

existence and the capital stock, or its equivalent, 

remains outstanding. §§39.23(c)–1, 39.23(g)–1. 

(Secs. 23(c), 23(g), ’39 Code; Secs. 164, 165, ’86 

Code.) 

Rev. Rul. 55-48, 1955-1 C.B. 281. 

66.140 Pistachio tree growers. A grower of 

pistachio nuts who is not subject to section 278(b) 

or 447 may currently deduct the costs of maintaining 

and transplanting pistachio seedlings, both 

before and after the first budding of the trees in the 

field. The grower, however, must capitalize the 

costs of initial planting and budding of the trees. 

Rev. Rul. 75-405 revoked. §§1.162-12, 

1.263(a)-1. (Secs. 162, 263; ’86 Code.) 

Rev. Rul. 83-28, 1983-1 C.B. 47. 

66.141 Postal lock boxes; furnished by postmaster. 

Postmasters who are required to furnish 

lock boxes or fixtures for the use of the public may 

deduct such costs either as a current business 

expense or recover such costs through annual 

depreciation charges. Where the lock boxes or fixtures 

purchased by a postmaster are held in excess 

of six months, they qualify as “property used in 

trade of business” for section 1231 purposes. 

§39.23(a)-1. (Sec. 23(a), ’39 Code; Secs. 162, 

167, 1231, ’86 Code.) 

Rev. Rul. 55-579, 1955–2 C.B. 47. 

66.142 Premium time or overtime; expedite 

construction; rolling mill. Premium time or 

overtime paid or incurred by a corporation, 

engaged in the manufacture of steel and steel products, 

solely to expedite the installation of additional 

stands in its rolling mill in order to minimize 

the shutdown time while the new equipment was 

being installed must be capitalized. §§1.162-1, 

1.263(a)-2. (Secs. 162, 263; ’86 Code.) 

Rev. Rul. 70-332, 1970–1 C.B. 31. 

66.143 Preventive measures against storm 

losses. Property damage losses due to abnormally 

high water levels on bodies of water are deductible 

as casualty losses if they are directly attributable 

to a storm or other casualty and are not caused by 

gradual erosion or inundation from normal seasonal 

variations in water levels. However, 

amounts expended for construction of protective 

works or for moving homes from their original 

locations to prevent probable losses from future 

storms constitute capital expenditures rather than 

deductible casualty losses. Rev. Rul. 79 superseded. 

§§1.165–7, 1.263(a)–1. (Secs. 165, 263; 

’86 Code.) 

Rev. Rul. 76-134, 1976–1 C.B. 54.


66.144 Promotional payments; public utility. 

Promotional payments in the form of cash allowances 

made by a public utility company to individuals 

or building contractors to encourage 

construction of “all gas” homes or to convert 

heating, hot water, or other systems to gas are capital 

in nature recoverable through depreciation. 

The investment credit will not be allowed for these 

assets. The other expenditures, such as salaries 

and advertising, are deductible business expenses, 

Distinguished by Rev. Rul. 69–331 with respect to 

bonuses and commissions paid to secure hot water 

heater leases. §§1.38-1, 1.48-1, 1.162-1, 

1.167(a)-3, 1.263(a)–2, 1.461-1. (Secs. 38, 48, 

162, 167, 263, 461; ’86 Code.) 

Rev. Rul. 68-561, 1968-2 C.B. 117. 

66.145 Protection of investment; bankruptcy 

reorganization. The taxpayer, whose business 

was the investment in securities of other companies 

owned over half the common stock of a corporation 

which became involved in a bankruptcy 

reorganization plan. The plan alloted no value to 

the stock and the taxpayer incurred expenses in 

successfully opposing it and proposing a plan 

alloting a value. Held, the expenses were deductible 

business expenses, not capital expenditures, 


Alleghany Corp., 28 T.C. 298, Acq., 1957-2 

C.B. 3. 

66.146 Public utility; inside wiring account. 

The cost charged to the inside wiring account of a 

public telephone company is a capital expenditure 

under section 263 and must be recovered under 

section 168. §§1.162–1, 1.263(a)–2. (Secs. 162, 

168, 263; ’86 Code.) 

Rev. Rul. 84-24, 1984–1 C.B. 89. 

66.147 Public utility; light watchmen and 

customer extensions. Expenditures made by a 

regulated public utility in installing “light watchmen” 

on customers’ premises and in extending its 

distribution system to service additional residential 

customers are excluded additions that must be 

capitalized and are not deductible expenditures as 

a part of the repair allowance under the CLADR 

system. §§1.167(a)–11, 1.263(f)-1. (Secs. 167, 

263; ’86 Code.) 

Rev. Rul. 78–67, 1978–1 C.B. 64. 

66.148 Public utility; replacement of lines. 

Expenditures incurred by a regulated public utility 

for the installation of new sections of overhead 

and underground electric transmission and distribution 

lines to take the place of retired lines that 

interfered with the construction of an expressway 

are capital expenditures. However, the costs of 

temporary relocations of existing power lines to 

maintain continuous service during the construction 

period of less than a year are deductible as 

business expenses. §1.263(a)-1. (Sec. 263, ’86 

Code.) 

Rev. Rul. 73-203, 1973-1 C.B. 146. 

66.149 Public utility; telephone wires 

replaced with buried cable. The cost of replacing 

telephone wires with buried cable is to be capitalized 

and depreciated over the useful life of the 

cable. §§1.162-4, 1.167(a)–1, 1.263(a)–2. (Secs. 

162, 167, 263; ’86 Code.) 

Rev. Rul. 82-12, 1982-1 C.B. 52. 

66.150 Public utility company; conversion of 

customers’ heating equipment. Amounts 

expended by a public utility company to convert 

or adapt its customers’ steam heating equipment to 

the use of gas are capital expenditures recoverable 

through depreciation. In computing the depreciation 

deduction under section 167 the methods 

described in subsection (b)(2), (3), and (4) may not 

be used. §§1.162-1, 1.167(a)-3, 1.263(a)-2. 

(Secs. 162, 167, 263; ’86 Code.) 

Rev. Rul. 71-469, 1971-2 C.B. 120. 

66.151 Railroads; classification yard; rearranged 

and reconstructed; retirement method. 

A railroad company, using the “retirement 

method” of accounting for depreciation of its 

track account assets, incurred certain costs to rearrange 

and reconstruct its classification yard, Held, 

(1) the adjusted basis and removal costs of the 

tracks removed and not replaced less the salvage 

value of the recovered materials are recoverable 

through depreciation; (2) the cost, including labor, 

for constructing new tracks and of betterment portions 

of the replacements are capitalized expenditures; 

and (3) the remaining costs, including labor, 

for installing the replacements (less the capitalized 

betterment portion) less salvage value of 

recovered materials are recoverable through 

depreciation. §§1.167(a)–1, 1.263(a)–1. (Secs. 

167, 263; ’86 Code.) 

Rev. Rul. 69-476, 1969-2 C.B. 40. 

66.152 Railroads; construction of stateowned 

bridge. Costs incurred by a railroad company 

for the construction of a state-owned bridge 

over its tracks are capital expenditures amortizable 

over the estimated time the bridge will be in 

use; future maintenance costs are deductible business 

expenses when paid or incurred. §§1.162-4, 

1.167(a)-3, 1.263(a)-1. (Secs. 162, 167, 263; ’86 

Code.) 

Rev. Rul. 69-229, 1969–1 C.B. 86. 

66.153 Railroads; cross ties replaced. When a 

railroad company uses the retirement-replacement-betterment 

method of accounting, the cost of 

replacing wood cross ties with concrete ties is to 

be expensed as a replacement. Rev. Rul. 68-418 

revoked. §§1.167(a)–1, 1.263(a)–1. (Secs. 167, 

263; ’86 Code.) 

Rev. Rul. 84-22, 1984-1 C.B. 35. 

66.154 Railroads; reballasting track; retirement 

method. The cost for reballasting tracks 

incurred by a railroad using the “retirement 

method” of accounting for depreciation of its 

track structure is to be capitalized where additional 

ballast applied results in the ballast depth 

being increased and the track raised, but the cost 

of the ballast that merely replaces the old ballast 

is an expense, where a superior type of ballast is 

used, the excess cost of the superior ballast over 

the cost of replacing the original ballast is capitalized; 

and labor costs to resurface the tracks as a 

result of reballasting are expensed regardless of 

whether the ballast cost is capitalized or expensed, 

§§1.162-4, 1.263(a)-1. (Secs. 162, 263; ’86 

Code.) 

Rev. Rul. 70-1, 1970–1 C.B. 54. 

66.155 Railroads; reconstruction of track 

embankment. The costs of a major construction 

project that is undertaken to protect a long section 

of railroad track embankment from water damage 

and includes the construction of a channel diversion 

of a river, concrete dikes, dams, and jetties, 

the installation of riprap, the extension and elevation 

of certain bridges, and pressure grouting and 

pole driving to firm-up the embankment are nondeductible 

capital expenditures. The cost of pole 

driving and pressure grouting of an incidental 

nature not related to the major construction project, 

however, may be deducted currently. The Service 

will not follow the Chicago, Burlington & 

Quincy R.R. Co, decision. Rev. Ruls. 54–356 and 

58-278 superseded. §§1.162-4, 1.263(a)-1. 

(Secs. 162, 263; ’54 Code.) 

Rev. Rul. 77-478, 1977-2 C.B. 81. 

66.156 Railroads; repairs; emergency equipment. 

The determination of whether an expenditure 

for repairs is to be classified as a deductible 

expense or a capital expenditure is not affected by 

the fact that the asset has been amortized in full or 

in part as an emergency facility. §39.23(a)4. 


Rev. Rul. 54-578, 1954-2 C.B. 84. 

66.157 Railroads; restoration of freight cars; 

programmed expenditures. Programmed expenditures 

for the major restoration of railroad 

freight-train cars that extend the useful life of the 

cars beyond the years used for depreciation purposes 

must recapitalized or charged to the reserve 

account and recovered through depreciation. 

§§1.162-4, 1.263(a)-1. (Secs. 162, 263; ’86 

Code.) 

Rev. Rul. 69-116, 1969-1 C.B. 85. 

66.158 Railroads; road crossings; retirement 

method. Costs for replacement of railway road 

crossings over railroad tracks are included in the 

term “section 38 property.” The retirement-replacement 

method of accounting for depreciation 

of crossings and the charge to expense of replacement 

costs are not proper. Such costs must be 

capitalized and depreciated over the useful lives of 

the crossings. §§1.48–1, 1.167(a)-1, 1.263(a)-1. 

(Secs. 48, 167, 263; ’86 Code.) 

Rev. Rul. 80-187, 1980-2 C.B. 19. 

66.159 Railroads; welded rail costs; retirement 

method. Where a railroad uses the retirement 

and replacement accounting method for 

depreciation, the initial costs of welding rail segment 

together are to be capitalized since a permanent 

improvement or betterment of the track has 

been effected. Where the welded rail is replaced 

with welded rail of the same kind and quality, no 

further betterment is involved and the rail replacement 

and labor costs, less the salvage value of the 

recovered rail, are properly charged to expense. 

Where joint or angle bars are retired because welding 

occurred, the unrecovered capitalized costs 

(including the original labor cost of installation) of 

the joint or angle bars, less their salvage value, are 

properly charged to expense. §§1.167(a)-1, 

1.263(a)-1. (Secs. 167, 263; ’86 Code.) 

Rev. Rul. 67-22, 1967-1 C.B. 52. 

66.160 Recreational facility purchased and 

conveyed to employees’ association. To attract 

new employees and reduce turnover during wartime 

labor shortage and increased business, taxpayer 

in 1944 purchased a small farm some distance 

from its business site, made improvements, 

and conveyed the farm to its foremen’s association 

for recreational use by company employees. Held, 

the cost of the farm and improvements were 

deductible business expenses, not capital expenditures. 

(Secs. 23(a), 24(a), ’39 Code; Secs. 162, 

263, ’86 Code.) 

Slaymaker Lock Co., 18 T.C. 1001, Acq., 

1953-2 C.B. 6. 

66.161 Reforestation. Generally, direct costs of 

reforestation including girdling, herbicide 

application, baiting of rodents, labor and tool 

expense, and planting and seeding equipment 

depreciation are capital expenditures recoverable 

through depletion allowances when the timber is 

cut or as adjusted basis if the timber is sold. Indirect 

costs, deducted in the year incurred or capitalized 

cumulatively under section 266, include 

interest paid on money borrowed or service 

charges on performance bonds in lieu thereof to 

satisfy a state law requiring a deposit to guarantee 

reforestation. Rev. Rul. 55–252 superseded. 

§§1.263(a)-1, 1.611-1, 1.1011-1. (Secs. 263, 611, 

1011; ’86 Code.) 

Rev. Rul. 75-467, 1975-2 C.B. 93. 

66.162 Reforestation. Cost sharing payments 

received from the Federal government under the 

forestry incentives program of the Agriculture and 

Consumer Protection Act of 1973 are includable in 

income, and the total costs of reforestation (not 

diminished by such payments) are to be capitalized 

as a cost of timber. §§1.61–1, 1.263(a)–1, 

1.611-3. (Secs. 61, 263, 611; ’86 Code.) 

Rev. Rul. 76-6, 1976–1 C.B. 176. 

66.163 Reforestation. The expenditures for 

destroying undesirable hardwood trees and brush 

in naturally reforested stands of southern pine

young growth are related to the seeding and establishment 

of the pine seedlings and are capital 

expenditures recoverable through depletion. 

§1.611-3. (Sec. 611, ’86 Code.) 

Rev. Rul. 76-290, 1976-2 C.B. 188. 

66.164 Reforestation; replacing dead seedlings. 

A timber producer sustains no deductible 

loss on the death, not due to casualty, of tree seedlings 

planted to reforest land from which it has harvested 

the mature timber. Amounts paid or 

incurred in replanting to replace the lost seedlings 

must be capitalized in accordance with reg. 

1.611–3(a). §§1.165–1, 1.611–1, 1.611–3. (Secs. 

165, 611; ’86 Code.) 

Rev. Rul. 81-2, 1981-1 C.B. 78. 

66.165 Rehabilitation of railroad cars. Cyclical 

expenditures for major rehabilitations of railroad 

freight-train cars are capital expenditures 

under section 263(a). §§1.162-4, 1.167(a)–11, 

1.263(a)-1. (Secs. 162, 167, 263; ’86 Code.) 

Rev. Rul. 88-57, 1988-2 C.B. 36. 

66.166 Release from option. The amount paid 

by a corporation to obtain release from an existing 

option, in order to present a clear and free title to 

its tangible assets and property in connection with 

its entering into a reorganization agreement, 

constitutes an additional cost of the tangible assets 

and property of such corporation should be allocated 

among the various assets covered by the 

option. (Sec. 263, ’86 Code.) 

Rev. Ru1. 55-557, 1955-2 C.B. 60. 

66.167 “Rent-up” fee paid to apartment 

management company. In connection with the 

development of a low-income housing complex, a 

limited partnership will pay a “rent-up” fee to an 

apartment management company to obtain tenants 

during the “rent-up” period and a permanent loan 

commitment fee to a lender for the lender’s promise 

to provide permanent financing upon the 

completion of the complex. The “rent-up” fee is 

a capital expenditure and must be amortized over 

the terms of the leases obtained and the permanent 

loan commitment fee must be capitalized and 

amortized over the loan term. §1.461–1. (Sec. 461, 

’86 Code.) 

Rev. Rul. 81–161, 1981–1 C.B. 313. 

66.168 Reorganization expenses paid by 

shareholders. Brokerage, legal, accounting and 

related expenses of a corporation which were 

assessed to and paid by its shareholders under a 

qualified plan of reorganization whereby the corporation 

acquired all of the voting stock of another 

corporation in exchange for its assets and distributed 

the stock to its shareholders in liquidation of 

the corporation are capital expenditures and are 

not deductible under section 212. Each shareholder 

may add the amount of such expenses 

which he paid to his basis in the stock he acquired 

pursuant to the reorganization. §§1.212–1, 

1.263(a)-1. (Secs. 212, 263; ’86 Code.) 

Rev. Rul. 67-411, 1967-2 C.B. 124. 

66.169 Repairs; general betterment programs. 

Taxpayer’s facilities needed repair, and 

after bankruptcy and a change in management, the 

profits earned were returned to the business as it 

modernized its operations. The Commissioner 

contended that the repair items were part of a general 

betterment program and should be capitalized 

even though, taken individually, they would be 

deductible as ordinary expenses. Held, no betterment 

program was in progress, and the expenses 

were deductible. (Sec. 23(a), ’39 Code; Sec. 162, 

’86 Code.) 

Keller Street Development Co., 37 T.C. 559, 

Acq., 1962-2 C.B. 5. 

66.170 Road grading and paving costs. Costs 

of grading and paving a road in connection with 

the development of a subdivision of rental property 

are nondeductible capital expenditures and 

are added to the basis of the property. Rev. Rul. 

55-253 superseded. §1.263(a)-1. (Sec. 263, ’86 

Code.) 

Rev. Rul. 73-377, 1973-2 C.B. 84. 

66.171 Road improvement by county. The 

amount paid to a county on a promissory note 

conditioned on, and payable upon, the county 

hard-surfacing the roads in the vicinity of the taxpayer’s 

property is not deductible as a charitable 

contribution; however, the amount paid is a capital 

expenditure. §§1.170A-1, 1.263(a)–1. (Secs. 170, 

263; ’86 Code.) 

Rev. Rul. 76-257, 1976-2 C.B. 52. 

66.172 Road paving. A dead end street adjoining 

taxpayer’s warehouse constituted property 

used in taxpayer’s trade or business and the cost of 

paving such road was a capital expenditure depreciable 

over a 20-year period. (Sec. 23(1), ’39 

Code; Sec. 167, ’86 Code.) 

D. Loveman & Son Export Corp., 34 T.C. 776, 

Acq., 1961-2 C.B. 5. 

66.173 Ship registry. Payments received pursuant 

to an agreement to retain ships under American 

registry so that the payor may transfer like 

ships to foreign registry under a temporary Maritime 

Administration policy are ordinary income 

and not capital gain since the agreement does not 

constitute a sale or exchange of property. The payments 

constitute capital expenditures to the payor 

since the value of such ships is increased. 

§1.1221-1. (Secs. 263, 1221; ’86 Code.) 

Rev. Rul. 58-296, 1958-1 C.B. 276. 

66.174 Sprinkler system; lease v. conditional 

sale. A renewable lease for the installation and use 

of an automatic sprinkler system was a contract for 

a conditional sale where the annual payments for 

the first five-year period of the lease approximated 

the cost of the system and of its installation. The 

amounts paid as “rent,” except to the extent representing 

interest or currently deductible charges, 

are capital expenditures recoverable through 

annual deductions for depreciation over the estimated 

life of the sprinkler system. §1.167(a)–1. 

(Secs. 167, 263; ’86 Code.) 

Rev. Rul. 57-371, 1957-2 C.B. 214. 

66.175 Stock dividend costs. The cost incurred 

by a corporation in connection with the issuance 

of its capital stock in payment of a stock dividend 

is a capital expenditure. §§1.162–1, 1.263(a)–1. 

(Secs. 162, 263; ’86 Code.) 

Rev. Rul. 60-254, 1960-2 C.B. 42. 

66.176 Stock exchange seats purchased; partnership 

funds. Amounts paid out of partnership 

funds for seats on stock exchanges and registered 

in the names of individual members of the partnership 

are capital expenditures. O.D. 473 superseded. 

§1.263(a)–1. (Sec. 263, ’86 Code.) 

Rev. Rul. 70-334, 1970-1 C.B. 56. 

66.177 Stock offering by trust. Expenses 

incurred by a trust and other shareholders in preparation 

for the public offering of stock must be 

capitalized; however, if the planned offering is 

later abandoned because of unfavorable market 

conditions, the capitalized expenditures are 

deductible as losses under section 165 in the year 

of the abandonment. §§165-2, 1.212-1, 

1.263(a)-1. (Secs. 165, 212, 263; ’86 Code.) 

Rev. Rul. 79-2, 1979-1 C.B. 98. 

66.178 Stock or liquidating dividend payments 

on borrowed stock; short sales. Loan premiums 

paid by an investor in securities in the 

acquisition of stock borrowed to cover short sales 

and amounts equal to ordinary cash dividends paid 

with respect to such stock are deductible. However, 

amounts paid by investors or traders with 

respect to nontaxable stock dividends or liquidating 

dividends on such borrowed stock are capital 

expenditures and are not deductible. I.T. 3989 and 


Rev. Rul. 60-359 superseded. §§1.212-1, 

1.263(a)-1. (Secs. 212, 263; ’86 Code.) 

Rev. Rul. 72-521, 1972–2 C.B. 178. 

66.179 Survey of shopping center. A survey of 

the taxpayer’s shopping center was made in connection 

with an unsuccessful attempt to obtain 

permanent financing, not for the acquisition of 

property and its cost was a deductible business 

expense. (Sec. 162, ’86 Code.) 

Herbert Shainberg, 33 T.C. 241, Acq., 1960-2 

C.B. 7. 

66.180 Swimming pool; medical. Taxpayer’s 

cost of constructing a special exercise or “lap” 

swimming pool to treat severe osteoarthritis, to the 

extent the expenditure exceeds any resulting 

increase in the value of taxpayer’s related property, 

is deductible as a medical expense. Rev. Ruls. 

54-57 and 59-411 modified. §1.213-1. (Sec. 213, 

’86 Code.) 

Rev. Rul. 83-33, 1983-1 C.B. 70. 

66.181 Swimming pool or elevator; medical 

purposes. The cost of constructing a swimming 

pool or installing an elevator on a taxpayer’s property 

constitutes an expenditure for permanent 

improvements which increase the value of the 

property and does not qualify as a deductible medical 

expense, even though such expenditure was 

made pursuant to the recommendation of a physician 

for health reasons. Modified by Rev. Rul. 

83-33. §§39.23(x)-1, 39.24(a)-2. (Secs. 23(x), 

24(a), ’39 Code; Secs. 213, 263, ’86 Code.) 

Rev. Rul. 54-57, 1954-1 C.B. 67. 

66.182 Television license. If a radio station is 

successful in securing from the Federal Communications 

Commission a particular television 

channel, the expenditures involved must be 

capitalized; if not successful they are deductible as 

a loss in the year permission to use the television 

channel is denied. However, since the useful life 

of the license is indefinite, a depreciation deduction 

is not allowable. §1.167(a)–3. (Secs. 165, 

167, 263; ’86 Code.) 

Rev. Rul. 56-520, 1956-2 C.B. 170. 

66.183 Television license; acquisition cost. 

Expenditures incurred in acquiring a television 

license and construction permit are capital expenditures 

and constitute a part of the cost basis of an 

asset of a permanent nature. Deductions for 

depreciation over the period of construction and 

the first three-year period of the license are not 

allowable for income tax purposes since the useful 

life of a television license is of an indeterminate 

duration. WDEF Broadcasting Co. decision will 

not be followed. §§39.23(1)–3, 1.167(a)–3. (Sec. 

23(1), ’39 Code; Sec. 167, ’86 Code.) 

Rev. Rul. 64-124, 1964-1 (Part 1) C.B. 105. 

66.184 Textbooks and visual aids; development 

and publication costs. Costs incurred by an 

accrual basis taxpayer in writing, editing, design 

and art work directly attributable to the development 

of textbooks and visual aids are capital 

expenditures. Costs incurred in the printing and 

publishing of such material should be inventoried 

with aliquot apportionment to the books and visual 

aids on hand at the end of the taxable year. Expenditures 

for manuscripts or visual aids that are 

abandoned may be deductible as losses under section 

165. The Service will not follow the decision 

in Stern holding that a taxpayer, in the business of 

writing books, may deduct traveling expenses 

incurred while researching, writing, and arranging 

material for a book. Note: See Sec. 2119 of Pub. L. 

94-455, 1976-3 C.B. (Vol. 1) 388. §§1.165-1, 

1.167(a)-1, 1.174-2, 1.263(a)-2, 1.471–1. (Secs. 

165, 167, 174, 263, 471; ’86 Code.) 

Rev. Rul. 73-395, 1973-2 C.B. 87. 

66.185 Timber cutting rights; assigned to 

limited partnership. A timber company assigned 

its right to cut timber on U.S. Forest Service land 

to a promoter who sold the rights to a limited part-


nership. Under the terms of the installment contract 

the total “interest” and principal payments 

the partnership will pay the promoter equal the 

promoter’s obligation to the timber company plus 

an override. The amounts designated as “interest” 

are part of the sales price. §§1.163–1, 1.263(a)–1. 

(Secs. 163, 263; ’86 Code.) 

Rev. Rul. 82–78, 1982–1 C.B. 30. 

66.186 Title index files. Amounts paid by a real 

estate title insurance company for a block of title 

files are nondeductible capital expenditures even 

though one-half of the files were duplicates of its 

own files. O.D. 1049 superseded. §1.263(a)–1. 

(Sec. 263, ’86 Code.) 

Rev. Rul. 70–26, 1970–1 C.B. 55. 

66.187 Trade catalog publication. Costs 

incurred in publishing a trade catalog with a useful 

life exceeding one year are not deductible business 

expenses but must be capitalized and depreciated 

over the useful life of the catalog. §§1.162–1, 

1.461-1. (Secs. 162, 461; ’86 Code.) 

Rev. Rul. 68-360, 1968-2 C.B. 197. 

66.188 Trademarks. The amount paid for preparing 

and filing an affadavit for the continued use 

of a trademark is a capital expenditure and not 

deductible. §39.24(a)-2. (Sec. 24(a), ’39 Code; 

Sec. 263, ’86 Code.) 

Rev. Rul. 55-158, 1955-1 C.B. 319. 

66.189 Transportation costs; horses acquired 

for breeding. Transportation costs and incidental 

charges incurred by a horse breeder in the acquisition 

of thoroughbred stud horses are capital expenditures 

to be included in the basis of the horses 

acquired and recovered through depreciation. I.T. 

2433 superseded. §§1.167(a)-1, 1.263(a)-1. 

(Secs. 167, 263; ’86 Code.) 

Rev. Rul. 72–113, 1972–1 C.B. 99. 

66.190 Unamortized bond expense; bond 

conversion to stock. Unamortized bond discount 

on convertible bonds ceases to be deductible as 

interest expense upon conversion of the bonds into 

stock. Any other unamortized bond expense 

assumes the character of a capital expenditure in 

connection with the stock. I.T. 2347 and G.C.M. 

9674 superseded. §§1.163-3, 1.263(a)-1, 

1.1232-1. (Secs. 163, 263, 1232; ’86 Code.) 

Rev. Rul. 72-348, 1972-2 C.B. 97. 

66.191 Underwriter’s fee; stock and bond 

exchange. The issuance by a corporation of 

debentures and common stock in exchange for its 

outstanding preferred stock, the aggregate fair 

market value of the former being greater than the 

fair market value of the latter, does not give rise to 

bond discount. Payments of fees to underwriters in 

effecting the exchange constitute capital expenditures, 

with the portion attributable to the debentures 

being amortizable proportionately over their 

term. §§1.162–1, 1.263(a)-1. (Secs. 162, 263; ’86 

Code.) 

Rev. Rul 59-387, 1959-2 C.B. 56. 

66.192 Uniform capitalization rules; creative 

property; safe harbor. Guidance is provided to 

certain authors, photographers, artists, and other 

similarly situated persons regarding the uniform 

capitalization rules under section 263A of the 

Code. 

Notice 88-62, 1988-1 C.B. 548. 

66.193 Unproductive and real property; 

advertising; maintenance and upkeep. A dvertising 

expense on unproductive property, and 

maintenance and upkeep costs attributable to 

improved and unimproved unproductive real 

property are not carrying charges chargeable to 

capital account. I.T. 2284 and I.T. 2701 superseded. 

§§1.266-1, 1.1016–2. (Secs. 266, 1016; 

’86 Code.) 

Rev. Rul. 71–475, 1971–2 C.B. 304. 

66.194 Vacation pay; employment on 

construction projects. Any amount of vacation 

pay for taxpayer’s employees that is attributable to 

employment on construction projects in its expansion 

program is not a deductible business expense; 

such vacation pay represents a capital expenditure, 

includible as part of the cost of the construction 

project. §§1.162–10, 1.263(a)–1. (Secs. 162, 

263; ’86 Code.) 

Rev. Rul 67-75, 1967-1 C.B. 41. 

66.195 Water well or test hole; abandonment. 

Amounts expended for drilling or deepening a 

water well to be used for irrigation and other agricultural 

purposes by a taxpayer engaged in the 

business of farming are capital expenditures. (Rev. 

Rul. 55–367). Any loss incurred on the abandonment 

of a well for bona fide business reasons is a 

deductible business loss in the taxable year such 

action is taken. (Rev. Rul. 56–599). Amplified to 

provide that amounts for drilling a test hole to 

ascertain the existence of water are capital expenditures 

if a sufficient supply of water is found and 

the well is developed; however, where the water 

supply is insufficient and the test hole is abandoned, 

the drilling expenditures are deductible 

losses. (Rev. Rul. 61-206). §§1.165-2, 

1.167(a)-8, 1.263(a)-1. (Secs. 165, 167, 263; ’86 

Code.) 

Rev. Rul. 55-367, 1955–1 C.B. 25; Rev. Rul. 

56-599, 1956-2 C.B. 122; Rev. Ru1. 61-206, 

1961-2 C.B. 57.

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