REVENUE RULE 92-31

1992-1 C.B. 101, 1992-17 I.R.B. 5.

Internal Revenue Service
Revenue Ruling

COSTS OF EMPLOYEE BENEFITS; SELF-CONSTRUCTED PROPERTY

Published: April 27, 1992

Section 263.-Capital Expenditures, 26 CFR 1.263(a)-1: Capital expenditures; in general.

(See Also Sections 162, 263A, 404, 419; 1.162-10, 1.263A-IT, 1.404(a)-1, 1.419-IT.)

Costs of employee benefits; self-constructed property. Costs of certain employee benefits for employees engaged in self-constructing the employer's property are nondeductible capital expenditures under section 263 of the Code. I.T. 3408 obsoleted.

The Internal Revenue Service periodically identifies as obsolete the rulings that it no longer considers determinative.

I.T. 3408, 1940-2 C.B. 178, interpreting section 23(a) of the Revenue Act of 1936 (a predecessor to section 162 of the Internal Revenue Code of 1986), stated that a taxpayer is entitled to an ordinary and necessary business expense deduction in the year of payment for reasonable amounts paid for sickness and accident benefits and reasonable amounts paid to its pension trust fund on behalf of its employees constructing property used in its business. I.T. 3408 also provides that these amounts, if taken as deductions from gross income, should not be added to the basis of the constructed property either as "overhead" or otherwise.

In Commissioner v. Idaho Power Co., 418 U.S. 1 (1974), 1974-2 C.B. 85, the Supreme Court of the United States held that the cost of depreciation for equipment used by the taxpayer to construct its own capital facilities (having a useful life of more than one year) must be capitalized under section 263 of the Code as a part of the cost of those facilities and must be depreciated under section 167 over the useful life of the facilities.

In Louisville & Nashville Railroad Co. v. Commissioner, 641 F.2d 435 (6th Cir. 1981), aff'g in relevant part 66 T.C. 962 (1976), the Sixth Circuit held that overhead costs, including those for fringe benefits (such as health and welfare), associated with building and rebuilding freight cars were required to be capitalized under section 263 of the Code rather than deducted currently as ordinary and necessary business expenses under section 162. The court agreed with the Tax Court, 66 T.C. at 1014, that the rationale in Idaho Power must control and recognized no distinction between the depreciation issue in that case and the fringe benefit cost issue in Louisville.

Section 263A of the Code, added by section 803(a) of the Tax Reform Act of 1986, 1986-3 (Vol. 1) C.B. 1, 267, and amended by section 10204 of the Revenue Act of 1987, 1987-3 C.B. 102, 114, requires the capitalization of the costs of self-constructed property, including the costs of sickness and accident coverage and pension plan contributions for employees.

Accordingly, I.T. 3408 is obsolete.

DRAFTING INFORMATION

The principal author of this revenue ruling is Stan Michaels of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Michaels on (202) 566-6384 (not a toll-free call).

Rev. Rul. 92-31, 1992-1 C.B. 101, 1992-17 I.R.B. 5.