Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 67-75

1967-1 C.B. 41

Sec. 162

Sec. 263

IRS Headnote

Any amount of vacation pay for taxpayer's employees that is attributable to employment on construction projects in its expansion program is not deductible under section 162 of the Internal Revenue Code of 1954. Such vacation pay represents a capital expenditure, properly includible as part of the cost of the construction project.

Full Text

Rev. Rul. 67-75

Advice has been requested regarding the deductibility of vacation pay attributable to work done by employees under the circumstances described below.

Taxpayer corporation, a public utility, is engaged in an expansion program involving use of its own employees in construction projects. The taxpayer claims that vacation pay is an ordinary and necessary expense currently deductible under section 162 of the Internal Revenue Code of 1954 even if such pay is attributable to an employee's work on construction of new buildings.

Section 162 of the Code allows as a deduction all ordinary and necessary expenses in carrying on any trade or business. Section 1.162-10 of the Income Tax Regulations provides, in part, that amounts paid or accrued within the taxable year for vacation pay are deductible under section 162(a) of the Code if they are ordinary and necessary expenses of the trade or business.

Section 263(a)(1) of the Code provides the general rule that no deduction shall be allowed for any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. Section 1.263(a)-2(a) of the regulations provides, in part, that the cost of acquisition, construction, or erection of buildings having a useful life extending substantially beyond the taxable year is an example of a capital expenditure.

Revenue Ruling 57-316, C.B. 1957-2, 626, considers `vacation allowances' paid to an employee includible in the definition of wages. The amount of overhead expenses incurred in connection with the construction of buildings must be included in the cost basis of the new building. See Algernon Blair, Inc. v. Commissioner , 29 T.C. 1205, at 1219 (1958), acquiescence, C.B. 1958-2, 4, with respect to the capitalization of all pertinent costs of a constructed asset.

Applying the foregoing authorities to the present case, the amount of vacation pay allocable to employment on the construction of new buildings is within the purview of the definition of wages includible in the labor costs for these new buildings and is properly considered a capital expenditure. Even though the taxpayer includes the amount of vacation pay in overhead on its books, such amount must be capitalized as part of the cost basis of the building.

Accordingly, any amount of vacation pay for taxpayer's employees that is attributable to employment on construction projects in its expansion program is not deductible under section 162 of the Code.