SECTION 5. TRACK MAINTENANCE

ALLOWANCE METHOD FOR CLASS II AND III RAILROADS

.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 of this revenue procedure (the track maintenance allowance) and the amount required to be capitalized under section 5.03 of this revenue procedure (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) new track structure; and

(3) Multiply the resulting amount in (2) by 75 percent.

.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

Ties $1,180,000 Rail & OTM 370,000 Ballast 600,000 Total $2,150,000

2002–41 I.R.B. 702 October 15, 2002

Included in this amount are:

New track structure Ties $150,000 Rail & OTM $250,000 Ballast $100,000 Total $500,000

Assigned value of relay materials Ties $ 30,000 Rail & OTM $120,000 Ballast $ 0 Total $150,000

All of these amounts 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. Thus, X’s current additions for the taxable year ending December 31, 2001, are $2,000,000 ($2,150,000 - $150,000).

For the same taxable year, X has expenditures for its track structure that are deducted for financial reporting purposes in the amount of $2,250,000.

Included in this amount are:

Salvage material credits ($50,000) Assigned value of relay materials $100,000

All of X’s expenditures for track structure that are deducted for financial reporting purposes are taken into account for federal income tax purposes in the taxable year ended December 31, 2001, except for the salvage material credits and the assigned value of relay materials. Thus, X’s

operating items for the taxable year ended December 31, 2001, are $2,200,000 ($2,250,000 + $50,000 – $100,000). For the taxable year ended December 31, 2001, X incurred removal costs in the amount of $300,000, which were not included in current additions or operating items, but which

are taken into account for federal income tax purposes in that year.

(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:

$2,000,000 current additions

2,200,000 operating items +300,000 removal costs $4,500,000 track structure expenditures

X then adjusts its track structure expenditures as follows:

$4,500,000 track structure expenditures

(500,000) new track structure $4,000,000 adjusted track structure expenditures

X then determines the track maintenance allowance as follows:

$4,000,000 adjusted track structure expenditures x .75 allowance $3,000,000 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:

$4,500,000 track structure expenditures

October 15, 2002 703 2002–41 I.R.B.

(3,000,000) track maintenance allowance $ 1,500,000 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 $1,000,000 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

Ties $1,150,000 $150,000 $1,000,000 $ 666,667 Rail & OTM $ 250,000 250,000 0 0 Ballast 600,000 100,000 500,000 333,333 Total $2,000,000 $500,000 $1,500,000 $1,000,000

Adjusted Current Additions

Current Additions

Amount Capitalized— New Track

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 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 § 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.