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Railroad Industry Capitalization Issues Impacted by the March 15, 2012, Stand Down Directive (LB&I-4-0312-004) Released after the Temporary Tangible Regulations were Issued December 23, 2011

LB&I Control No: LB&I-04-1212-013
Impacted IRM 4.51.2

December 7, 2012

MEMORANDUM FOR All LB&I Employees
FROM: Heather C. Maloy /s/ Heather C. Maloy
Commissioner, Large Business & International Division
SUBJECT: Railroad Industry Capitalization Issues Impacted by the March 15, 2012, Stand Down Directive (LB&I-4-0312-004) Released after the Temporary Tangible Regulations were Issued December 23, 2011

This memorandum provides direction to the field for the examination of railroad industry taxpayers.

Background

Temporary Tangible Regulations (issued on December 23, 2011) provide examples that illustrate routine maintenance rules and betterments rules for locomotives and freight cars. LB&I issued a directive to the field (LB&I-4-0312-004; March 15, 2012) (hereinafter referred to as the "stand down directive") requiring agents to stand down or suspend current examination activity on certain issues involving:

  1. Whether costs incurred to maintain, replace or improve tangible property must be capitalized under I.R.C. § 263(a); and

  2. Any correlative issues involving the disposition of structural components of a building or dispositions of tangible depreciable assets.

Questions have been raised concerning the application of the stand down directive to issues addressed in two previous LB&I Field Guidance Directives for the examination of railroad industry taxpayers. These two Directives were issued on March 4, 2005, and concern cyclical overhauls, betterments and rebuilds of locomotives and freight cars for Class I railroads.

Scope of this Directive

This directive applies to current examination activity that includes Railroad Industry issues concerning the cyclical overhauls, betterments and rebuilds of locomotives and freight cars for Class I railroads.

Planning and Examination Guidance

The Temporary Tangible Regulations apply to the issues pertaining to the cyclical overhauls, betterments and rebuilds of locomotives and freight cars for Class I railroads. Therefore the stand down directive is applicable and examiners should follow the steps as outlined in the directive.

Field Guidance Directives Withdrawn

The following directives are withdrawn and are no longer effective:

  1. 03-04-05 Field Guidance on the Planning and Examination of the Cyclical Overhauls, Betterments, and Rebuilds of Locomotives for Class I Railroads

  2. 03-04-05 Field Guidance on the Planning and Examination of the Cyclical Overhauls, Betterments, and Rebuilds of Freight Cars for Class I Railroads

Previously Published Guidance

The Temporary Tangible Regulations do not alter or invalidate previously published guidance addressing the treatment of network assets for particular industries, such as the track maintenance allowance method for Class I, II or III railroads. Therefore, the stand down directive is not applicable and examiners should not follow the stand down directive for these issues (see Rev. Proc. 2002-65 (2002-2 CB 700) and Rev. Proc. 2001-46 (2001-2 CB 263)). 

Contacts

For further guidance regarding this directive, please contact a member of either the Deductible and Capital Expenditures or the Methods of Accounting and Timing Issue Practice Groups. 

This Directive is not an official pronouncement of law, and cannot be used, cited, or relied upon as such.

cc:    Division Counsel, LB&I
         Chief, Appeals                               

Page Last Reviewed or Updated: 06-Nov-2013