Rev. Rul. 80-93

1980-1 C.B. 50, 1980-14 I.R.B. 9.

                       Internal Revenue Service
                                 Revenue Ruling

      DEPRECIATION; LAND PREPARATION COSTS; ELECTRIC AND GAS DISTRIBUTION
                                    SYSTEMS

                            Published: April 7, 1980

26 CFR 1.167(a)-2: Tangible property.

(Also Section 263; 1.263(a)-1.)

  Depreciation; land preparation costs; electric and gas distribution systems. Amounts paid by the developer of a mobile home park to a public utility for underground electric and gas distribution systems are capital expenditures that are included in the developer's cost basis of the land. Examples illustrate which land preparation costs may be depreciated by the developer and which must be included in the basis of the land.

ISSUE

  Is a depreciation deduction allowable company to assist in construction of company to assist in construction of an electrical distribution system and for land preparation costs that are incurred in connection with the development of a mobile home park?

FACTS

  The taxpayer owns and operates a mobile home park in which it rents sites to tenants on a monthly basis.  The taxpayer constructed asphalt roadways, concrete sidewalks, laundry facilities, storm sewers, and assets at each individual site that include a concrete driveway, patio, and mobile home supports.

  The major part of the taxpayer's land preparation costs was incurred in the clearing, grubbing, cutting, filling, and rough grading necessary to bring the land to a suitable grade.  Additional land preparation costs were incurred in the digging and the rough and finish grading necessary to construction of the roadways, sidewalks, driveways, patios, and mobile home supports.  Land preparation costs do not include the cost of construction of the depreciable roadways, sidewalks, driveways, patios, and mobile home supports.  Replacement of the roadways, sidewalks, driveways, patios and mobile home supports will not require additional digging or grading.

  Other land preparation costs were incurred in the excavation and backfilling necessary to construction of the laundry facilities and the storm sewer system.  Replacement of the underground components of these facilities owned by the taxpayer will require excavation and backfilling.

  At the taxpayer's request, a public utility company installed an underground electrical distribution system instead of a less expensive system aboveground. The taxpayer contracted to pay the additional cost and to assist the utility company in the cost of a natural gas distribution system. The utility company will retain full ownership, provide all necessary maintenance, and replace the systems as necessary.

LAW AND ANALYSIS

  Section 167(a) of the Internal Revenue Code provides that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear, and obsolescence of property used in the trade or business.

  Section 1.167(a)-2 of the Income Tax Regulations provides that the depreciation allowance applies only to that part of tangible property subject to wear and tear, to decay or decline from natural causes, to exhaustion, and to obsolescence, but not to land apart from the improvements or physical development added to it.

  Section 263(a)(1) of the Code provides that no deduction shall be allowed for any amount paid out for permanent improvements or betterments made to increase the value of any property or estate.

  Costs for land preparation such as site clearing, grubbing, cutting, filling, and rough grading are one time only expenditures. Such work will not be affected by replacement of the components of the mobile home park. Similarly, the digging and rough and finish grading associated with construction of the roadways, sidewalks, and the assets at the individual home sites have a useful life that extends beyond the life of those assets since the work will not have to be repeated when the assets are replaced.  On the other hand, the excavation and backfilling required for installation of the laundry facilities and the storm sewer system are so closely associated with those assets that replacement of the assets will require the physical destruction of that land preparation. See Rev. Rul. 74-265, 1974-1 C.B. 56, and Rev. Rul. 72-96, 1972-1 C.B. 67.

  The amounts paid to the utility company for the installation of the underground electrical distribution system and the natural

gas distribution system are expenditures that increase the value of the land.  They are nonrecurring because the utility company will repair and replace the systems as necessary.

HOLDING

  Land preparation costs, such as those for necessary clearing, grubbing, cutting, filling, and rough and finish grading (generally or with respect to individual assets), that will be unaffected by replacement of the components of the mobile home park and therefore will not be replaced contemporaneously therewith are nonrecurring general land improvement costs.  These one time land preparation costs are considered inextricably associated with the land and, as such, are to be added to the taxpayer's cost basis in the land and are not depreciable.

  Those land preparation costs that are so closely associated with assets such as the storm sewers and laundry facilities that they will be retired, abandoned, or replaced contemporaneously with those assets are to be capitalized and depreciated over the estimated useful lives of the assets with which they are associated.

  The amounts paid to the utility for the underground electrical system and the gas distribution system are nonrecurring costs for betterments that increase the value of the land.  As such, these amounts are capital expenditures within the meaning of section 263(a) of the Code that are includible in the taxpayer's cost basis of the land and are not depreciable.

Rev. Rul. 80-93, 1980-1 C.B. 50, 1980-14 I.R.B. 9.