TAX RESEARCH MEMO: U.S. TAX COURT ASSIGNMENT INSTRUCTIONS OVERVIEW For this assignment, you will be submitting a tax research memo regarding the scenario detailed below. The memo will be due by 11:5
ACCT 612
Tax Research Memo TemplateYour Firm
Your Town and State
Date
Relevant Facts The 30-mile piece of rail will be repaired by the Pima and Southern Railroad (PSRR). Contractors who are interested have already submitted their offers to PSRR. The upgrading of the old track line will cost a sum of $12 million and out of that cost $5 million will be the cost of new track line, $3 million will cater for the cost of installing the line, $2 million is cost of grading the road bed and improvement while the cost of removing the old track will be $1.5 million. The value of the old track line is worthy $0.2 million as salvage. The upgraded track is predicted to last 35-40 years in Arizona.Specific Issues
Casey Jones is interested in knowing whether cost of improvement of the track line will be capitalized or deducted.
Casey Jones also wants to know if implementing uniform capitalization rules would present any challenge for PSRR.
Conclusions
Because the PSRR costs associated with upgrading the truck line are all indirect costs, rule §263A requires that all indirect costs be capitalized. As a result, all indirect costs of upgrading the track must be capitalized and cannot be deducted. This is because the costs were incurred during the pre-production stage and not during the actual production process.
Support
When it comes to the first question of whether to deduct or capitalize, PSRR has no choice except to capitalize the expense. §263A states that no deductions can be made for property improvement or betterment. Because the rebuilt track represents an improvement, the cost paid to improve the track cannot be deducted. This section of the law works in the opposite direction of Casey Jones' expectations. Casey Jones's second concern is the application of uniform capitalization rules. All pre-construction and pre-development costs must be capitalized, according to §263 uniform capitalization rules. The indirect costs that are exempt from being capitalized are those that are less than $200,000, however the indirect costs involved in improving the track in this case were more than $200,000.
26 CFR § 1.263(a)-1 - Capital expenditures; in general. Legal information Institute: Retrieved from https://www.law.cornell.edu/cfr/text/26/1.263(a)-1
________ Discuss with client. Date discussed ________
________ Prepare a memo or letter to the client
________ Explore other fact situations
________ Other action. Describe:___________________________
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Preparer ________ Reviewer ________ Partner ________
