rr-01-60.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

Part I
Section 167.--Depreciation
26 CFR 1.167(a)-2: Tangible property.
(Also ' 168.)
Rev. Rul. 2001-60
ISSUE
Are land preparation costs incurred by a taxpayer in the original construction or
reconstruction of golf course greens subject to an allowance for depreciation under
' 167 of the Internal Revenue Code?
FACTS
Two types of golf course greens that are currently in use are "push-up" or natural
soil greens and "modern" greens. Push-up or natural soil greens are essentially
landscaping that involves some reshaping or regrading of the land. The soil is pushed
up or reshaped to form the green. While push-up or natural soil greens may have
limited irrigation systems (such as hoses and sprinklers adjacent to the greens), a
subsurface drainage system is not utilized.
Modern greens make use of technological changes in green design and
construction and contain sophisticated integrated drainage systems. The construction
of the modern green occurs after the general earthmoving, grading, and initial shaping
of the area surrounding and underneath the green. These greens are constructed with
a network of subsurface drainage tiles or interconnected pipes, one or more layers of
gravel and/or sand particles, a rootzone layer, and a variety of turfgrass. Over time, the

-2-
modern green loses its effectiveness as a drainage system due to tile or pipe
deterioration, or sediment blockage. Replacement of the subsurface drainage tiles or
pipes requires excavation and replacement of the gravel layer, rootzone layer, and
turfgrass above the tiles or pipes. The subsurface drainage tiles or pipes typically are
replaced within 20 years.
LAW AND ANALYSIS
Section 167(a) provides that there shall be allowed as a depreciation deduction a
reasonable allowance for the exhaustion and wear and tear of property used in a trade
or business or held for the production of income.
Section 1.167(a)-2 of the Income Tax Regulations provides that in the case of
tangible property, the depreciation allowance applies only to that part of the property
that is subject to wear and tear, to decay or decline from natural causes, to exhaustion,
and to obsolescence. The allowance does not apply to land apart from the
improvements or physical development added to it.
The depreciation deduction provided by ' 167(a) for tangible property placed in
service after 1986 generally is determined under ' 168. This section prescribes two
methods of accounting for determining depreciation allowances: (1) the general
depreciation system in ' 168(a); and (2) the alternative depreciation system in ' 168(g).
Under either depreciation system, the depreciation deduction is computed by using a
prescribed depreciation method, recovery period, and convention.
The applicable recovery period for purposes of ' 168(a) or ' 168(g) is

-3-
determined by reference to class life. Section 168(i)(1) provides that the term "class
life" means the class life (if any) that would be applicable with respect to any property
as of January 1, 1986, under former ' 167(m) as if it were in effect and the taxpayer
had elected under that section. Prior to its revocation, ' 167(m) provided that in the
case of a taxpayer who elected the asset depreciation range system of depreciation,
the depreciation deduction would be computed based on the class life prescribed by the
Secretary that reasonably reflects the anticipated useful life of that class of property to
the industry or other group.
Rev. Proc. 87-56, 1987-2 C.B. 674, sets forth the class lives of property that are
necessary to compute the depreciation allowance under ' 168. This revenue
procedure establishes two broad categories of depreciable assets: (1) asset classes
00.11 through 00.4 that consist of specific assets used in all business activities; and (2)
asset classes 01.1 through 80.0 that consist of assets used in specific business
activities.
Asset class 00.3, Land Improvements, of Rev. Proc. 87-56 includes
improvements directly to or added to land, whether the improvements are ' 1245 or
' 1250 property, provided the improvements are depreciable. Examples of these
assets might include sidewalks, roads, canals, waterways, drainage facilities, sewers,
wharves and docks, bridges, fences, landscaping, shrubbery, or radio and television
transmitting towers. Assets included in asset class 00.3 have a recovery period of 15
years for purposes of ' 168(a) and 20 years for purposes of ' 168(g).

-4-
Rev. Rul. 55-290, 1955-1 C.B. 320, concludes that expenditures incurred by a
taxpayer in the original construction of golf course greens are capital expenditures that
are added to the original cost of the land and are not subject to an allowance for
depreciation. The revenue ruling also concludes that subsequent operating expenses
for sod, seed, soil, and other sundry maintenance are ordinary and necessary business
expenses that are deductible from gross income for federal income tax purposes.
In Edinboro Company v. United States, 224 F.Supp. 301 (W.D.Pa. 1963), the
court held that golf course improvements, such as greens, tees, fairways, and traps,
were not depreciable under ' 167(a) because they are not distinguishable from the
land, which is molded and reshaped to form them, and, like the land, they have an
unlimited useful life. The court concluded that "[a] golf course is primarily a landscaping
proposition[, although] [o]ccasionally a green or a trap or bunker is altered or rebuilt."
The taxpayer in Edinboro failed to demonstrate a determinable useful life of the golf
course improvements, or that the improvements were subject to wear and tear,
exhaustion, or obsolescence that could not be fully reversed by annual maintenance.
Although the depreciation allowance generally does not apply to land because
land has no determinable useful life, land preparation may be depreciable if it is closely
associated with depreciable assets so that it is possible to establish a determinable
period over which the land preparation will be useful in a particular trade or business.
A useful life for land preparation is established if it will be replaced contemporaneously
with a related depreciable asset. Whether land preparation will be replaced

-5-
contemporaneously with a related depreciable asset is a question of fact, but if the
replacement of the asset will require the physical destruction of the land preparation,
this test will be considered satisfied. Rev. Rul. 68-193, 1968-1 C.B. 79, clarifying
Rev. Rul. 65-265, 1965-2 C.B. 52 (costs for a roadway grading that would be retired
contemporaneously with a building are depreciable); Rev. Rul. 72-96, 1972-1 C.B. 66
(land preparation costs for a reservoir that would be retired contemporaneously with an
electric generating plant are depreciable); Rev. Rul. 74-265, 1974-1 C.B. 56 (the cost
of shrubbery immediately adjacent to apartment buildings is depreciable because the
shrubbery would be retired contemporaneously with the buildings); Rev. Rul. 80-93,
1980-1 C.B. 50 (costs for excavation and backfilling that would be retired
contemporaneously with laundry facilities and a storm sewer system are depreciable).
While ' 168 determines the amount of the depreciation allowance provided by
' 167(a) for tangible property placed in service generally after 1986, ' 167 determines
whether the tangible property is depreciable property. Under ' 167 and the regulations
thereunder, land is not depreciable. Similarly, the costs of general grading or shaping
of land are not depreciable because the land preparation is inextricably associated with
the land. However, if the land preparation is so closely associated with depreciable
assets that it will be retired, abandoned, or replaced contemporaneously with those
assets, a useful life for land preparation is established and, therefore, the cost of the
land preparation is depreciable.
Push-up or natural soil greens are representative of the type of green commonly

-6-
in use when Rev. Rul. 55-290 was issued and Edinboro was decided. Push-up or
natural soil greens are essentially landscaping that involves some reshaping or
regrading of the land. Accordingly, the Service will continue to follow the holdings in
Rev. Rul. 55-290 and Edinboro with respect to push-up or natural soil greens.
Unlike push-up or natural soil greens, the modern green is a sophisticated
improvement to the land carefully designed to facilitate drainage. Essential
components of the modern green are the underground drainage tiles or interconnected
pipes. Because these tiles or pipes deteriorate over time, they have a determinable
useful life and, therefore, are depreciable. Asset class 00.3, Land Improvements, of
Rev. Proc. 87-56, includes drainage facilities. The gravel layer, rootzone layer, and
turfgrass above the network of underground drainage tiles or interconnected pipes are
so closely associated with these tiles or pipes that replacement of the tiles or pipes will
require the contemporaneous physical destruction of that land preparation. Thus, it is
possible to establish a determinable useful life for the land preparation above the
underground tiles and pipes.
HOLDINGS
Land preparation undertaken by a taxpayer in the original construction or
reconstruction of push-up or natural soil greens is inextricably associated with the land
and, therefore, the costs attributable to this land preparation are added to the
taxpayer's cost basis in the land and are not depreciable.
The costs of land preparation undertaken by a taxpayer in the original

-7-
construction or reconstruction of modern greens that is so closely associated with
depreciable assets, such as a network of underground drainage tiles or pipes, that the
land preparation will be retired, abandoned, or replaced contemporaneously with those
depreciable assets are to be capitalized and depreciated over the recovery period of the
depreciable assets with which the land preparation is associated. For purposes of
' 168, the modern green described above is includible in asset class 00.3, Land
Improvements, of Rev. Proc. 87-56. However, the general earthmoving, grading, and
initial shaping of the area surrounding and underneath the modern green that occur
before the construction are inextricably associated with the land and, therefore, the
costs attributable to this land preparation are added to the taxpayer's cost basis in the
land and are not depreciable.
Subsequent operating expenses for sod, seed, soil, and other sundry
maintenance are ordinary and necessary business expenses that are deductible from
gross income for federal income tax purposes.
CHANGE IN METHOD OF ACCOUNTING
Any change in a taxpayer=s treatment of the cost of modern greens to conform
with this revenue ruling is a change in method of accounting to which the provisions of
'' 446 and 481 and the regulations thereunder apply. A taxpayer wanting to change
the method of accounting for the cost of modern greens owned by the taxpayer at the
beginning of the year of change to conform with this revenue ruling must follow the
automatic change in method of accounting provisions in Rev. Proc. 99-49,

-8-
1999-2 C.B. 725 (or its successor), unless the scope limitations in section 4.02 of
Rev. Proc. 99-49 apply.
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 55-290 is modified and superseded. Rev. Proc. 99-49 is modified and
amplified to include this accounting method change in the APPENDIX.
PROSPECTIVE APPLICATION
A taxpayer may continue to use its present method of treating the cost of modern
greens placed in service during any taxable year beginning before November 29, 2001,
as a nondepreciable capital expenditure.
DRAFTING INFORMATION
The principal author of this revenue ruling is Mark Pitzer of the Office of
Associate Chief Counsel (Passthroughs and Special Industries). For further information
regarding this revenue ruling, contact Mark Pitzer at (202) 622-3110 (not a toll-free call).