Section of Taxation Publications
  VOL. 60
NO. 1
FALL 2006
Contents | TTL Home


Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.


Karen Berenthal


Businesses stand to save a lot of tax if they can characterize money spent on mechanical repairs as ordinary and necessary business expenses. Indeed, FedEx tried to save $66,474,287.10 for taxable years 1993 and 1994 by characterizing certain engine and auxiliary power unit repairs as deductible, ordinary, and necessary business expenses under section 162. The Service disagreed and treated the repairs as nondeductible capital expenditures. This dispute was the issue before a Tennessee federal district court in FedEx Corp. v. United States.

Ordinary and necessary business expenses are deductible in the current year, whereas capital expenditures must be capitalized and depreciated over the life of an asset. Repairs are considered ordinary and necessary expenses when they are merely “incidental repairs,” but are considered capital expenditures when they add to the value of the property, prolong the useful life of the property, or adapt the property to a new or different use. Under these guidelines, there is no bright line rule for what kinds of repairs will be deductible. The Supreme Court has recognized that “the decisive distinctions between current expenses and capital expenditures are those of degree and not of kind, and that because each case turns on its special facts, the cases sometimes appear difficult to harmonize.” Determining whether repairs are properly characterized as deductible expenses or capital expenditures can be a baffling process. Courts have created numerous, often conflicting methods for reaching their conclusions on this issue.

This Note discusses the district court’s evaluation of whether FedEx’s airplane engine repairs were capital expenditures or deductible expenses. The court’s analysis is divided into two sections: identifying the relevant unit for analysis (the engines or the airplanes) and then determining whether repair of that unit was a deductible expense or capital expenditure. The court crafted a four factor analysis, gleaned from prior case law, and determined that the relevant unit of property was the entire airplane. The court then applied a hybrid test based on Plainfield-Union Water Co. v. Commissioner and Smith v. Commissioner, and concluded that the repairs were deductible expenses.

The analysis section of this Note explores the sufficiency of the four factor test that the court created and identifies at least one missing, but relevant, factor: whether the component was regularly rotated in and out of service. It then discusses the court’s hybrid analysis of the repairs done to the aircraft and suggests that the court crafted a proper test but applied it incorrectly. Finally, the Note explores how the FedEx court’s opinion would have been affected by recently proposed regulations concerning this area of the law. Although this Note identifies certain errors in the court’s analysis, it is likely that the Service believes the court’s holding was correct in light of the recently proposed regulations.



Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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