Rev. Rul. 84-24

1984-1 C.B. 89, 1984-7 I.R.B. 5.

                       Internal Revenue Service
                                 Revenue Ruling

    CAPITAL EXPENDITURES;  INSIDE WIRING ACCOUNT;  PUBLIC TELEPHONE COMPANY

                          Published: February 13, 1984

26 CFR 1.263(a)-2: Examples of capital expenditures

(Also Sections 162, 168; 1.162-1.)

  Capital expenditures;  inside wiring account;  public telephone company.  The cost charged to the inside wiring account of a public telephone company is a capital expenditure under section 263 of the Code and must be recovered under section 168.

ISSUE

  Are the costs charged to the inside wiring account of a public telephone company to be currently expensed under section 162(a) of the Internal Revenue Code or, alternatively, capitalized under section 263(a) and recovered under section 168?

FACTS

  On March 31, 1981, the Federal Communications Commission (FCC) issued its First Report and Order (effective October 1, 1981), which amended the Uniform System of Accounts to change the accounting treatment of certain station connection costs previously capitalized and included in Account 232, Station Connections.  As a result of these changes, certain future station connection costs associated with inside wiring that had been included in Account 232 will no longer be capitalized but will be charged to Account 605, Installation and Repairs of Station Equipment, and expensed in the year incurred.

  In 1981, the taxpayer, a telephone company that is a public utility subject to the FCC and the State A Public Service Commission (PSC), timely filed an Application For Change in Accounting Method (Form 3115).  The taxpayer requested permission to change its method of accounting, for federal income tax purposes, for costs associated with "inside wiring," previously capitalized and included in Account 232, to a method of expensing such costs which will be charged to Account 605.

  The taxpayer incurs certain costs in the installation of inside wiring.  Such costs include the cost of labor and the costs of materials.  In addition, taxpayer will maintain and repair the inside wiring.  The taxpayer has title to the inside wiring and on request from the subscriber the taxpayer may sell the inside wiring to a subscriber.

  The FCC decision to change the accounting treatment of inside wiring was primarily based on its belief that the costs of inside wiring primarily benefitted the current subscriber and therefore the cost should be placed on the causative subscriber rather than on current and future subscribers as under the prior system.

  State A PSC pursuant to the FCC procedure has issued an order requiring public utility telephone companies to expense the cost of inside wiring.

  The decision by the taxpayer to change its accounting method is based on FCC rules and regulations which were amended and which were adopted by the State A PSC, requiring telephone companies to expense, in the year incurred for book purposes, the costs associated with inside wiring which had been included in Account 232.

LAW AND ANALYSIS

  Section 263(a) of the Code provides that as a general rule 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 of the regulations sets forth examples of capital expenditures including the cost of acquisition, construction or erection of buildings, machinery and equipment, furniture and fixtures, and similar property having a useful life substantially beyond the taxable year.

  In Rev. Rul. 82-12, 1982-1 C.B. 52, the FCC rules and regulations required the replacement cost of telephone wires to be expensed. However, that Revenue Ruling holds that the costs of replacing telephone wires with buried cable is in the nature of a replacement or permanent improvement and is to be capitalized under section 263(a) of the Code and depreciated over the useful life of the cable under section 167(a).

  The facts in this case indicate that the taxpayer installs, maintains and repairs the inside wiring.  In addition, the taxpayer retains title to the inside wiring and has the right to sell the inside wiring to a subscriber.  The taxpayer has an identifiable asset used in its business, which is an integral part of the system of delivering service to the subscriber.  The inside wiring has a useful life that extends beyond the current year.  Its installation is therefore in the nature of a permanent improvement.  The fact that it may be required for regulatory purposes to recoup expenditures currently does not negate its having a capital expenditure for Federal income tax purposes.  See Old Colony Railroad Co. v. Commissioner, 284 U.S. 552 (1932) X1-1 C.B. 274 AT 277

(1932) and Rev. Rul. 70-118, 1970-1 C.B. 34.

HOLDING

  The cost of inside wiring is a capital expenditure under section 263 of the Code and such cost must be recovered under section 168.

Rev. Rul. 84-24, 1984-1 C.B. 89, 1984-7 I.R.B. 5.