SECTION 1. PURPOSE

This revenue procedure provides a safe harbor method of accounting for track structure expenditures paid or incurred by a Class II or Class III railroad (“track main

October 15, 2002 701 2002–41 I.R.B.

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). If after allocating the capital track structure expenditures to new track there are no adjusted current additions, the remaining capitalized amount must be allocated to each track account in proportion to the ending book account balance in each track capital account for the taxable year. 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 determined in (3)) to determine the additional § 263A costs (as defined in § 1.263A– 1(d)(3)), 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 § 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 Example.

(1) Facts. X is a railroad that owns and maintains track structure in the United States. X uses a calendar year for tax purposes. For the year ending December 31, 2001, X treats the following amounts as capital additions to its track structure for financial reporting purposes:

able for the use intended by the taxpayer, that are taken into account for federal income tax purposes. New track structure includes the cost of acquiring and installing new track structure as well as the cost of any rehabilitation or improvement necessary to put newly acquired or previously abandoned track structure into operation. New track structure does not include any removal costs.

.05 Assigned Value of Relay Materi- als. The “assigned value of relay materials” means the amounts that reflect the taxpayer’s fair market value adjustments (excluding rewelding and other processing costs) for track materials relaid that were previously retired for financial reporting purposes. The assigned value of relay materials does not include relay track materials purchased by the taxpayer.

.06 Operating Items. “Operating items” are the amounts included in track structure expenditures that represent expenditures for track structure that are deducted for financial reporting purposes and that are taken into account for federal income tax purposes. Thus, for example, operating items do not include salvage material credits or the assigned value of relay materials.

.07 Salvage Material Credits . “Salvage material credits” means the amounts that reflect credits for the value of salvaged materials.

.08 Removal Costs. “Removal costs” means the amount included in track structure expenditures that represents the taxpayer’s expenditures for track removal for financial reporting purposes not already included in current additions or operating items and that are taken into account for federal income tax purposes.