The Internal Revenue Service let the commercial airlines know in early January when it will let them deduct the cost of major maintenance on airplanes. The agency is expected to use the same guidelines with power companies for maintenance on power plants. The guidelines come after years of negotiation — and litigation — between the IRS and the airlines over this issue. They are in Rev. Rul. 2001-4.

The new guidelines address when the airlines can deduct the cost of heavy maintenance of the kind that is done once every eight years and involves stripping down the airplane to inspect parts and replace ones that are worn. Large commercial airliners are expected to last 25 years. The airlines argue that this maintenance merely gives the aircraft its expected life and does not extend it or enhance the value of the plane.

The IRS posited three situations. In one, an airline spent $2 million overhauling an airplane that it bought new for $15 million 16 years ago. The airline “extensively disassembled” the airframe and replaced an unknown number of parts. The maintenance took 45 days to complete. The IRS said the full cost could be deducted because there was no material upgrade of the plane. The work merely “maintained the relative value.”

In the next case, the IRS said the situation was identical except that the belly of the airplane fuselage was so corroded that the airline had to replace all the skin panels, and it also used the opportunity to upgrade the plane by installing a new ground proximity warning system, new fire prevention equipment, and phones for passengers. The IRS said the cost of the upgrades — the new belly for the fuselage and the other equipment — had to be added to the tax basis in the plane. However, the other maintenance costs could still be deducted.

In the third fact pattern, the airline made “extensive modifications” to a 22-year old plane that was near the end of its useful life in order to give it new life. The cost of all this work — even maintenance that would have been deductible under the other two fact patterns — had to be “capitalized” or added to basis.

Reaction from the airlines has been muted.