## Facts

- A commercial airline (Taxpayer) operated aircraft subject to FAA requirements, including an FAA-approved continuous maintenance program incorporated into each aircraft’s maintenance manual.
- The maintenance manual required periodic maintenance visits over an aircraft’s operating life; the most extensive was a “heavy maintenance visit” (e.g., D check), performed about every eight years to prevent deterioration and restore safety and reliability.
- When each aircraft was placed in service, the Taxpayer reasonably anticipated up to a 25-year useful life, considering expected repairs and maintenance needed to keep the aircraft in ordinarily efficient operating condition.
- In each situation addressed, the aircraft was fully depreciated for federal income tax purposes at the time of the heavy maintenance visit.
- Situation 1: The Taxpayer incurred $2 million to perform a heavy maintenance visit on an aircraft airframe, involving extensive disassembly, inspection, servicing, functional checks, minor restorations, and replacement of certain life-limited parts; the work did not materially increase value, substantially prolong useful life, or adapt the aircraft to a new or different use.
- Situation 2: During a heavy maintenance visit, the Taxpayer also performed additional work that materially increased value, substantially prolonged useful life, or adapted the airframe to a new or different use, in addition to routine maintenance tasks.
- Situation 3: The Taxpayer conducted a broader plan of rehabilitation, modernization, or improvement, of which the heavy maintenance visit formed a part.

## Issues

1. Whether costs incurred for aircraft airframe work, including heavy maintenance visits, are deductible as ordinary and necessary business expenses under I.R.C. § 162.
2. Whether, and to what extent, such costs must be capitalized under I.R.C. §§ 263 and 263A when the work constitutes an improvement or is performed as part of a rehabilitation/modernization plan.

## Decision

- Heavy maintenance visit airframe costs are generally deductible under § 162 when they merely prevent deterioration or restore the aircraft to its prior safety and reliability condition.
- Costs incurred in conjunction with a heavy maintenance visit must be capitalized to the extent they materially add value, substantially prolong useful life, or adapt the airframe to a new or different use.
- Costs incurred as part of a plan of rehabilitation, modernization, or improvement must be capitalized, even if some tasks resemble repairs when viewed in isolation.
- Application:
  - Situation 1: The $2 million heavy maintenance costs were currently deductible under § 162.
  - Situation 2: Routine repair/maintenance components were deductible, but the incremental improvement-related costs were required to be capitalized under §§ 263 and 263A.
  - Situation 3: Costs tied to the overall rehabilitation/modernization plan were required to be capitalized.

## Legal Principles

- § 162 permits a current deduction for ordinary and necessary business expenses, including repairs and maintenance that keep property in ordinarily efficient operating condition.
- §§ 263 and 263A require capitalization of amounts paid to acquire, produce, or improve property, including expenditures that materially add value, substantially prolong useful life, or adapt property to a new or different use.
- A recurring, FAA-required heavy maintenance visit that is anticipated as part of the asset’s expected operating life generally does not, by itself, substantially prolong useful life beyond the period reasonably contemplated when placed in service.
- A single maintenance event may contain both deductible repair elements and capitalizable improvement elements; the tax treatment follows the character of the specific work and its effects.
- Under the plan-of-rehabilitation doctrine, expenditures that are part of a coordinated rehabilitation, modernization, or improvement program are capitalizable notwithstanding that individual steps might otherwise resemble repairs.

## Conclusion

The ruling treats routine, recurring heavy aircraft maintenance that restores expected operating condition as a deductible business expense, while requiring capitalization for improvement components and for expenditures undertaken as part of a broader rehabilitation, modernization, or improvement plan.


Rev. Rul. 2001-4, 2001-1 C.B. 295 (2001)