Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 69-86

1969-1 C.B. 50

Sec. 162

IRS Headnote

Voluntary payments by a property owner toward construction of improvements to a downtown shopping area on city-owned property are business expenses, amortizable over the ten-year period during which the city will maintain the improvements.

Full Text

Rev. Rul. 69-86

Advice has been requested as to the deductibility of voluntary payments by a property owner toward construction of improvements on city-owned land, under the circumstances described below.

An association of businessmen proposes replacement of the existing conventional type "permanent improvements" in the downtown shopping area with ceramic tile sidewalks, a cobblestoned mall, continuous canopies over the walkways, repaving of streets, new drainage, parking, and landscaping, including modern lighting, flower boxes, attractive trash receptacles, benches, and fountains. The improvements would become the property of the city and be maintained by it. The property owner in the instant case anticipates the revitalization will reverse the present downward economic trend of the downtown shopping area and enable it to fully tenant its building at adequate rentals.

The amount each property owner is to pay is determined by a formula based upon front footage and proximity to the improvements.

The city is obligated to pay half the cost of the improvements on condition the property owners pay the rest. The city cannot, under the State constitution, assess abutting landowners for streets or other public improvements of the type here contemplated.

The city will maintain the improvements for at least 10 years in consideration of the payments by the property owners, reserving the right to alter, improve, modify, or, after 10 years, to remove them.

Section 162(a) of the Internal Revenue Code of 1954 provides, in part, that there shall be allowed as a deduction all the ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business.

The anticipated direct business benefits from the improvements will extend substantially beyond the taxable year.

In view of the foregoing, it is held that the payments made by the property owner to help finance the construction of the above-described improvements on city-owned property for the purpose of attracting more shoppers into the downtown shopping area, are expenditures made in the ordinary course of a trade or business with benefits extending beyond the taxable year. These expenditures are amortizable over the 10-year period during which the city will maintain the improvements.