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Revenue Ruling 88-99, 1988-2 CB 33

REV-RUL, 88FED ¶6809, Depreciation: Logging truck roads.--, Revenue Ruling 88-99, 1988-2 CB 33, (Jan. 01, 1988)

[Code Sec. 167 ]

Depreciation: Logging truck roads.--The parts of logging truck roads constructed by the taxpayer are depreciable or amortizable if the parts have useful lives to the taxpayer that are determinable. Rev. Rul. 68-281 clarified.

ISSUE

What parts of logging truck roads have determinable useful lives to a taxpayer and, therefore, qualify for depreciation or amortization?

FACTS

In the situations below, the taxpayer harvests timber from land that it owns and produces lumber, lumber products, and paper from the cut timber. The taxpayer constructed logging truck roads to harvest the timber, to transport the logs cut from the timber to its facilities for processing, and to carry out general management activities.

Construction of logging truck roads includes clearing, grubbing, and grading (rough cut and fill operations) to prepare the roadbed. Culverts and bridges are added to the roads as necessary to provide drainage, and surfacing (graveling or paving) is added to facilitate traffic flow. The surfacing, bridges, and culverts also protect the roadbed. The surfacing, bridges, and culverts are subject to wear, tear, and exhaustion and must be replaced on a periodic basis during general road maintenance. The roadbed of a properly maintained road is not normally subject to wear, tear, and exhaustion in the sense in which those terms are generally used and is not replaced on a periodic basis.

Situation 1. On land that it owns, the taxpayer constructed a logging truck road for use in its logging operations and general timber management activities. The road is expected to be properly maintained for use by the taxpayer for an indefinite period. It is not expected to be retired, replaced, or abandoned in relation to the retirement of the processing facilities, but will continue to be used to manage and harvest timber for processing at other facilities. Past experience with similar roads indicates that the surfacing will have to be replaced in 7 years and the bridges and culverts will have to be replaced in 20 years. The roadbed, however, is not expected to need replacing.

Situation 2. On land that it owns, the taxpayer constructed a logging truck road solely for harvesting a certain stand of timber. It is reasonable to expect that harvesting of the timber will take 4 years. Following the harvesting of the timber, the cutover land is expected to be reforested, and the road to be abandoned.

LAW AND ANALYSIS

Section 167(a)(1) of the Internal Revenue Code provides the general rule that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear, and tear of property used in a trade or business. In the case of tangible property, section 1.167(a)-2 of the Income Tax Regulations provides that the depreciation allowance applies only to that part of the property which is subject to wear and tear, to decay or decline from natural causes, to exhaustion, and to obsolescence.

Section 1.167(a)-1(b) of the regulations provides that for purposes of section 167 of the Code, the estimated useful life of an asset is not necessarily the useful life inherent in the asset, but is the period over which the asset may reasonably be expected to be useful to the taxpayer in its trade or business.

Rev. Rul. 68-281, 1968-1 C.B. 22, considers whether logging truck roads qualify for an investment tax credit as section 38 property. Section 38 property includes property with respect to which depreciation is allowable and which has a useful life of 3 years or more. Section 48(a)(1) of the Code. That revenue ruling considers six situations in which the taxpayer, a producer of lumber, lumber products, and paper, constructed logging truck roads.

The physical attributes of the roads considered in Rev. Rul. 68-281 allowed them to be described as either "permanent" (high specification, mainline-type roads intended for general use) or "temporary" (other roads, typically those constructed for a particular logging operation). Under that ruling, the cost of the roadbeds of the temporary roads was nominally amortized, while the cost of the roadbeds of the permanent roads was placed in a nondepreciable account. This accounting treatment and other facts described in that ruling indicate that there happened to be a correspondence between the period during which those roads were expected to be of use in the business of the taxpayer described in the ruling and the physical characteristics that allowed the roads to be described as either temporary or permanent. Apparently because of this correspondence, some taxpayers have misinterpreted Rev. Rul. 68-281 as suggesting that the physical characteristics of a road can be determinative as to whether the roadbed is depreciable or amortizable, regardless of the period during which the road is expected to be useful in the taxpayer's business.

To be depreciable or amortizable, property must have a useful life to the taxpayer that is determinable. The fact that a logging truck road is not a high-specification, mainline-type road is not determinative of whether its roadbed has a determinable useful life to the taxpayer. Once constructed, the roadbed of less substantial roads may prove useful for an indefinite period of time. Furthermore, the fact that the facility in which the logs are processed has a limited useful life is not dispositive of the question of determinable useful life. The useful life of the facility has no effect on the useful life of the road or any of its parts unless the road will be retired, replaced, or abandoned in relation to retirement of the facility. See Rev. Rul. 68-193, 1968-1 C.B. 79.

In Situation 1, the logging truck road is expected to be useful to the taxpayer for an indefinite period. However, the surfacing is expected to need to be replaced in 7 years, and the bridges and culverts, in 20 years; therefore, they have useful lives to the taxpayer that are determinable. The roadbed, however, is not expected to be replaced on a periodic basis or to be retired, replaced, or abandoned in relation to the retirement of the facilities in which logs cut from the timber are currently processed. The roadbed, therefore, does not have a useful life to the taxpayer that is determinable.

In Situation 2, all parts of the logging truck road have useful lives to the taxpayer that are determinable. The useful life of the road terminates on the completion of the timber harvesting and reforestation.

HOLDING

In Situation 1, the surfacing, bridges, and culverts of the logging truck road have useful lives to the taxpayer that are determinable. This surfacing and these bridges and culverts are, therefore, depreciable or amortizable. The useful life to the taxpayer of the roadbed, however, is not determinable, and the roadbed is not depreciable or amortizable.

In Situation 2, the logging truck road has a determinable useful life to the taxpayer. The roadbed, as well as the surfacing, bridges, and culverts, are depreciable or amortizable.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 68-281 is clarified.

DRAFTING INFORMATION

The principal author of this revenue ruling is Harold E. Burghart of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Mr. Burghart on (202) 566-3292 (not a toll-free call).