Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 69-87

1969-1 C.B. 57

Sec. 165

Sec. 167

IRS Headnote

A deduction for an abandonment loss is not allowable for portions of grading and parts of bridges left in place where one railroad track of a multi-track line is retired without replacement, but the line is continued in use.

Full Text

Rev. Rul. 69-87

Advice has been requested whether deductions are allowable to a railroad company for portions of its railroad grading and parts of its bridges left in place where one of the railroad tracks of a multi-track line is retired and not replaced, but the line is continued in use.

To increase operating efficiency on one of its multi-track lines, the railroad installed a new signal system to govern the movement of trains. As a result, the company retired, without replacing, one of its tracks in the line. The question is whether the company is entitled to deduct losses for portions of the underlying grading and for parts of the bridges of the line, because they serve a lesser number of tracks and no longer serve their original purpose.

Section 165 of the Internal Revenue Code of 1954 provides generally for the deduction of any loss sustained during the taxable year and not compensated for by insurance or otherwise. The rules applicable to obsolescence and abandonment of nondepreciable property (such as the railroad grading in this case) are found in section 1.165-2(a) of the Income Tax Regulations. In order for any loss to be allowed on the grading under that section of the regulations it is necessary to show that it was permanently discarded from use. Grading, in its most general sense, means the alteration or modification of the ground surface to either improve the utility of the land, or to adapt it to a specific use, such as for use by a railroad. Railroad grading consists of excavations and embankments for the formation of the roadbed, including ditching, diversions of roads and streams, and preparation of the roadbed surface for the track structure (ballast, ties, rail, and other track material). The grading, which is common to all the tracks of the line, includes embankments constructed to elevate the tracks above the ground level and cuts with side ditches.

The operation of the railroad in the instant case is more efficient as a result of the installation of the new signal system. All the traffic formerly carried on the two or more tracks is now carried over the one or more remaining tracks. The roadbed surface where the retired track structure was previously located, is now available for use to more efficiently maintain the remaining tracks with "off-track" roadway machinery that the taxpayer had acquired. For safety considerations, rail traffic would normally be slowed while maintenance and reconstruction work is performed; however, with the additional roadbed surface, using the "off-track" machinery located there, rail traffic is able to proceed at near normal speeds during such work. In some locations, the remaining tracks have been shifted to the center of the roadbed surface, thus leaving more work space on either side of the remaining tracks, and lessening the dangers from rock falls and slides. The grading considered attributable to the track removed, still serves useful purposes to the taxpayer, though it does not serve its original purpose. Thus, the taxpayer continues to use the grading, though for different purposes.

In view of the foregoing, it is held that the retirement of one of the tracks does not result in an abandonment loss of a portion of the grading considered attributable to the track removed. Not until the grading in question has been permanently discarded would the taxpayer be entitled to an abandonment loss deduction.

Furthermore, those portions of bridges left in place which were attributable to the track removed remain structurally as basic parts of the bridges supporting the remaining tracks. Therefore, the requirements under section 1.167(a)-8(a)(4) of the regulations for physical abandonment of a depreciable asset have not been satisfied. Accordingly, under the circumstances described above, deductions are not allowable to the railroad company for those portions of the grading and of the bridges left in place.