REPAIRS take center stage in court.
The IRS has been working this year on a possible revenue ruling to explain when money spent on maintenance at existing power plants is a “repair” or an “improvement.” The cost of repairs can be deducted immediately. The cost of improvements must be added to the “tax basis” that a company has in its power plant and recovered much more slowly through depreciation. Improvements are more expensive to undertake after the tax consequences are taken into account.
The airlines worked out bright-line tests several years ago with the IRS. However, they have not been happy with what they have been able to negotiate.
Federal Express is in federal district court in Tennessee arguing about where lines should be drawn in its case.
In late April, the judge in the case declined to rule — as Federal Express has requested — that an aircraft and its engines are a single “unit of property” for purposes of determining whether maintenance is a repair or improvement. For example, if Federal Express spent $80,000, this is more likely to be a repair if the entire aircraft is the unit of property than if the unit of property is an engine blade. Federal Express argued that the judge should settle the issue of what is the unit of property after reading legal briefs from itself and the government without the need for a full-blown trial. The judge declined. The case is headed for trial.
An IRS working group told the power industry earlier this year that it cannot agree on what is the unit of property in cases involving power plants. The group agrees that the property unit is smaller than the entire power plant, but that a turbine — perhaps something even a little larger — is a separate unit of property.