## Facts

- FedEx operated a large fleet of aircraft used in an integrated overnight delivery business.
- During tax years ending May 31, 1993, and May 31, 1994, FedEx incurred substantial “off-wing” engine maintenance costs, including work performed during periodic engine shop visits (ESVs) and related auxiliary power unit (APU) maintenance.
- ESVs required removing engines from aircraft for significant maintenance and overhaul work; per-ESV costs ranged from roughly $50,000 to $1 million.
- FedEx deducted ESV and related APU costs as ordinary and necessary business expenses under I.R.C. § 162 and Treas. Reg. § 1.162-4.
- After examining FedEx’s returns, the IRS reclassified these expenditures as capital improvements under I.R.C. § 263(a), asserting the work prolonged engine life and therefore had to be capitalized.
- FedEx paid the assessed deficiencies and interest (about $70 million) and filed a refund action in federal district court under 28 U.S.C. § 1346(a)(1).
- Following a bench trial, the court issued findings of fact and conclusions of law under Fed. R. Civ. P. 52.

## Issues

1. Whether FedEx’s 1993–1994 ESV and related APU maintenance expenditures were currently deductible repair/maintenance expenses under I.R.C. § 162 and Treas. Reg. § 1.162-4, or capital expenditures required to be capitalized under I.R.C. § 263(a) and Treas. Reg. § 1.263(a)-1.
2. What “unit of property” should be used to evaluate whether the work materially increased value or appreciably prolonged useful life: the entire aircraft or each engine/APU as a separate asset.

## Decision

- The court held FedEx’s ESV and related APU maintenance costs were deductible repair expenses under § 162 rather than capital expenditures under § 263(a).
- The court determined the proper unit of property for the repair-versus-capital analysis was the entire aircraft, not the individual engines or APUs.
- The court rejected the IRS’s contention that the size of the expenditures, standing alone, required capitalization.
- FedEx was entitled to a refund to the extent taxes were paid based on the IRS’s capitalization position.

## Legal Principles

- Amounts paid to keep property in an ordinarily efficient operating condition, without materially adding value, appreciably prolonging useful life, or adapting the property to a new or different use, are generally deductible as repairs under Treas. Reg. § 1.162-4.
- Amounts paid for permanent improvements or betterments that increase the value of property, prolong its life, or adapt it to a different use must be capitalized under I.R.C. § 263(a) and Treas. Reg. § 1.263(a)-1.
- The repair/capital inquiry depends on the correct “unit of property”; integrated components may be treated as part of a larger operating asset where the taxpayer and industry treat the property as a single economic unit.
- Under the Plainfield-Union comparison approach, the factfinder evaluates the condition and value of the relevant property before and after the work to determine whether the expenditure materially increased value or prolonged the useful life of that property.
- The word “incidental” in the repair regulation does not create a separate dollar-magnitude test; large recurring expenditures may still be deductible if they simply restore the property to its prior condition and are part of expected maintenance over the asset’s economic life.

## Conclusion

The court treated the aircraft as the relevant unit of property and found that FedEx’s engine shop visits and related APU work were recurring maintenance that restored components to prior condition and kept aircraft operating efficiently, making the costs currently deductible repairs rather than capital improvements.


FedEx Corp. v. United States, 291 F. Supp. 2d 699 (W.D. Tenn. 2003)