SECTION 5. TRACK MAINTENANCE

ALLOWANCE METHOD

.01 In General. Under the track maintenance allowance method, the taxpayer must determine the amount of its track structure expenditures that may be currently deducted under section 5.02 (the

track maintenance allowance) and the amount required to be capitalized under section 5.03 (the capitalized amount). A taxpayer that uses the track maintenance allowance method described in this section 5 must use that method for all of its track structure expenditures.

.02 Track Maintenance Allowance. The track maintenance allowance for a particular taxable year under the track maintenance allowance method is determined as follows:

(1) Determine the track structure expenditures for the taxable year;

(2) Subtract from the track structure expenditures in (1) the following amounts for the taxable year:

(a) New track structure; and (b) Operating items; (3) Multiply the resulting amount in (2) by 40 percent; and

(4) Add to the product of (3) the operating items for the taxable year.

.03 Capitalized Amount. The capitalized amount for the taxable year under the track maintenance allowance method is determined as follows:

(1) Determine the track structure expenditures for the taxable year (see section 5.02(1));

(2) Subtract from the track structure expenditures in (1) the track maintenance allowance determined under section 5.02 for the taxable year to determine the capital track structure expenditures;

(3) Allocate the capital track structure expenditures determined in (2) to each track account (Rail and OTM, Ties, and Ballast), first to new track to the extent of the new track structure for each track account. The remaining capitalized amount represents replacement track and should be allocated to each track account in proportion to adjusted current additions ( i.e., current additions for each track account after excluding the amount allocated to new track from each account). For purposes of determining basis, the amounts allocated to each track account must be allocated further to the assets within each account using any reasonable method;

(4) For each track account, apply the taxpayer’s method of accounting for uniform capitalization, as governed by § 263A and the regulations thereunder, to the amounts capitalized to new track and to replacement track ( i.e., the amounts de

September 10, 2001 264 2001–37 I.R.B.

termined in (3)) to determine the additional § 263A costs (as defined in § 1.263A–1(d)(3)), whether positive or negative, and, if applicable, interest costs that must be capitalized;

(5) For each track account, add the amounts capitalized to new track and to replacement track in (3) to the additional § 263A costs and interest costs determined in (4) to determine the total capitalized amount;

(6) For each track account, treat the total capitalized amount determined in (5) as a capital expenditure and depreciate that amount in accordance with § 167 and the regulations thereunder.

.04 Changes to Form R-1. If the STB modifies the Form R-1 by changing the names of any account, column, or line on the Schedule 330 or 410, any references to that account, column, or line in this revenue procedure (including the definitions in section 4 of this revenue procedure) are automatically modified accordingly. Thus, for example, if the STB changes Schedule 330 to require the reporting of current additions in Column (f), rather than Column (e), any reference to Column (e) in this revenue procedure is to be treated by the taxpayer as a reference to Column (f). If the STB no longer requires Form R-1, or any schedule refer

enced in this revenue procedure, a change in material facts upon which the original consent was based will have occurred. See section 6.05 of this revenue procedure (Effect of Consent).

(1) Facts. X is a railroad that owns and maintains several thousand miles of track structure throughout the United States. X is a member of a combined reporting group that files a calendar year Form R-1 and uses a calendar year for tax purposes. For the year ending December 31, 2001, X includes the following amounts in the Form R-1, Schedule 330, Column (e) for Accounts 8, 9, and 11:

.05 Example .

Account 8 (Ties) $1,500,000 Account 9 (Rail & OTM) 2,500,000 Account 11 (Ballast) 500,000 Total $4,500,000

Included in this amount are:

New track structure Account 8 $ 150,000 Account 9 $ 250,000

Account 11 $ 100,000

Total $ 500,000 Assigned value of relay

materials - Schedule 330 Account 8 $ 30,000 Account 9 $ 120,000

Account 11 $ 0

Total $ 150,000

All of X’s current additions are taken into account for federal income tax purposes in the taxable year ended December 31, 2001, except for the assigned value of relay materials - Schedule 330. Thus, X’s current additions for the taxable year ending December 31, 2001, are $4,350,000 ($4,500,000 - $150,000). For the same taxable year, the following amounts included in the Form R-1, Schedule 410, Column (h) for Lines 1, 12, 13, 14, 15, 16, and 17, constitute X’s operating items:

Line 1 (Track - Administration) $ 315,000 Line 12 (Ties - Running) 100,000 Line 13 (Ties - Switching) 10,000 Line 14 (Rail & OTM - Running) 600,000 Line 15 (Rail & OTM - Switching) 60,000 Line 16 (Ballast - Running) 150,000 Line 17 (Ballast - Switching) 15,000 Total $1,250,000 Included in this amount are:

Salvage material credits - Schedule 410 ($50,000)

Assigned value of relay

materials - Schedule 410 $100,000

2001–37 I.R.B. 265 September 10, 2001

All of X’s operating items are taken into account for federal income tax purposes in the taxable year ended December 31, 2001, except for the salvage material credits Schedule 410 and the assigned value of relay materials - Schedule 410. Thus, X’s operating items for the taxable year ended

December 31, 2001, are $1,200,000 ($1,250,000 + $50,000 - $100,000). For the taxable year ended December 31, 2001, X included in Account 735 the following amount which is taken into account for federal income tax purposes in the taxable year ended December 31, 2001:

Removal costs $300,000 (2) Track maintenance allowance. To determine the track maintenance allowance for the taxable year ended December 31, 2001, X first determines its track structure expenditures, as follows:

$4,350,000 current additions

1,200,000 operating items + 300,000 removal costs $5,850,000 track structure expenditures

X then adjusts its track structure expenditures as follows:

$5,850,000 track structure expenditures

(500,000) new track structure (1,200,000) operating items $4,150,000 adjusted track structure expenditures

X then determines the track maintenance allowance as follows:

$4,150,000 adjusted track structure expenditures x .40 allowance $1,660,000 +1,200,000 operating items $2,860,000 track maintenance allowance

(3) Capitalized amount. To determine the capitalized amount, X first determines the capital track structure expenditures by subtracting the track maintenance allowance determined in (2) as follows:

$5,850,000 track structure expenditures (2,860,000) track maintenance allowance $2,990,000 capital track structure expenditures

X then allocates its capital track structure expenditures to each track account (Rail and OTM, Ties, and Ballast), first to new track to the extent of the $500,000 of new track structure for each track account. The remaining $2,490,000 of capital track structure expenditures is then allocated to replacement track for each track account in proportion to the adjusted current additions. Thus, X allocates these amounts as follows:

Amount Amount Adjusted Capitalized – Current Capitalized – Current Replacement Additions New Track Additions Track

Account 8 (Ties) $1,470,000 $ 150,000 $1,320,000 $ 853,714 Account 9 (Rail & OTM) 2,380,000 250,000 2,130,000 1,377,585 Account 11 (Ballast) 500,000 100,000 400,000 258,701 Total $4,350,000 $ 500,000 $3,850,000 $2,490,000

For each track account, X applies its method of accounting for uniform capitalization under § 263A to the amounts capitalized to new track and to replacement track to determine the additional § 263A costs (whether positive or negative) that must be capitalized. The total capitalized amount for each track account is determined by combining the amounts capitalized to new track and to replacement track

with the additional § 263A costs for each track account. X must depreciate the total capitalized amount for each track account in accordance with § 167 and the regulations thereunder.