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Part I
Section 162.-Trade or Business Expenses
26 CFR 1.162-1: Business Expenses
(Also sections 263; 263A; sections 1.162-4, 1.263(a)-1, 1.263A-1)
Rev. Rul. 2001-4
ISSUE
Are costs incurred by a taxpayer to perform work on its aircraft airframe,
including the costs of a Aheavy maintenance visit,@ deductible as ordinary and
necessary business expenses under ' 162 of the Internal Revenue Code, or must they
be capitalized under '' 263 and 263A?
FACTS
X is a commercial airline engaged in the business of transporting passengers
and freight throughout the United States and abroad. To conduct its business, X owns
or leases various types of aircraft. As a condition of maintaining its operating license
and airworthiness certification for these aircraft, X is required by the Federal Aviation
Administration (AFAA@) to establish and adhere to a continuous maintenance program
for each aircraft within its fleet. These programs, which are designed by X and the
aircraft=s manufacturer and approved by the FAA, are incorporated into each aircraft=s
maintenance manual. The maintenance manuals require a variety of periodic
maintenance visits at various intervals during the operating lives of each aircraft. The
most extensive of these for X is termed a Aheavy maintenance visit@ (also known in the
industry as a AD check,@ Aheavy C check,@ or Aoverhaul@), which is required to be

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performed by X approximately every eight years of aircraft operation. The purpose of a
heavy maintenance visit, according to X=s maintenance manual, is to prevent
deterioration of the inherent safety and reliability levels of the aircraft equipment and, if
such deterioration occurs, to restore the equipment to their inherent levels.
In each of the following three situations, X reasonably anticipated at the time the
aircraft was placed in service that the aircraft would be useful in its trade or business for
up to 25 years, taking into account the repairs and maintenance necessary to keep the
aircraft in an ordinarily efficient operating condition. In addition, each of the aircraft in
the following three situations is fully depreciated for federal income tax purposes at the
time of the heavy maintenance visit.
Situation 1
In 2000, X incurred $2 million for the labor and materials necessary to perform a
heavy maintenance visit on the airframe of Aircraft 1, which X acquired in 1984 for $15
million (excluding the cost of engines). To perform the heavy maintenance visit, X
extensively disassembled the airframe, removing items such as its engines, landing
gear, cabin and passenger compartment seats, side and ceiling panels, baggage
stowage bins, galleys, lavatories, floor boards, cargo loading systems, and flight control
surfaces. As specified by X=s maintenance manual for Aircraft 1, X
then performed
certain tasks on the disassembled airframe for the purpose of preventing deterioration
of the inherent safety and reliability levels of the airframe. These tasks included
lubrication and service; operational and visual checks; inspection and functional checks;
restoration of minor parts and components; and removal, discard, and replacement of
certain life-limited single cell parts, such as cartridges, canisters, cylinders, and disks.

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Whenever the execution of a task revealed cracks, corrosion, excessive wear,
or dysfunctional operation, X was required by the maintenance manual to restore the
airframe to an acceptable condition. This restoration involved burnishing corrosion;
repairing cracks, dents, gouges, punctures, or scratches by burnishing, blending, stop-
drilling, or applying skin patches or doublers over the affected area; tightening or
replacing loose or missing fasteners, rivets, screws, bolts, nuts, or clamps; repairing or
replacing torn or damaged seals, gaskets, or valves; repairing or replacing damaged or
missing placards, decals, labels, or stencils; additional cleaning, lubricating, or painting;
further inspecting or testing, including the use of sophisticated non-destructive
inspection methods; repairing fiberglass or laminated parts; replacing bushings,
bearings, hinges, handles, switches, gauges, or indicators; repairing chaffed or
damaged wiring; repairing or adjusting various landing gear or flight surface control
cables; replacing light bulbs, window panes, lenses, or shields; replacing anti-skid
materials and stops on floors, pedals, and stairways; replacing floor boards; and
performing minor repairs on ribs, spars, frames, longerons, stringers, beams, and
supports.
In addition to the tasks described above, X also performed additional work as
part of the heavy maintenance visit for Aircraft 1. This work included applying corrosion
prevention and control compounds; stripping and repainting the aircraft exterior; and
cleaning, repairing, and painting airframe interior items such as seats, carpets, baggage
stowage bins, ceiling and sidewall panels, lavatories, galleys, and passenger service
units. Other additional work included implementing certain outstanding service bulletins
(ASBs@) issued by the aircraft manufacturer and airworthiness directives (AADs@ ) issued

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by the FAA. Implementing these SBs and ADs involved inspecting specific skin
locations and applying doublers over the areas where cracks were found; inspecting
bolts or fasteners at specific locations, and replacing those found to be broken, worn, or
missing; and installing structural reinforcements between body frames in a small area in
the lower aft fuselage to reduce skin wrinkling and replacing a small number of the
wrinkled skin panels in this area with stronger skin panels.
None of the work performed by X as part of the heavy maintenance visit
(including the execution of SBs and ADs) for Aircraft 1 resulted in a material upgrade or
addition to its airframe or involved the replacement of any (or a significant portion of
any) major component or substantial structural part of the airframe. This work
maintained the relative value of the aircraft. The value of the aircraft declines as it ages
even if the heavy maintenance work is performed.
After 45 days, the heavy maintenance visit was completed, and Aircraft 1 was
reassembled, tested, and returned to X=s fleet. X
then continued to use Aircraft 1 for
the same purposes and in the same manner that it did prior to the performance of the
heavy maintenance visit. The performance of the heavy maintenance visit did not
extend the useful life of the airframe beyond the 25-year useful life that X anticipated
when it acquired the airframe.
Situation 2
Also in 2000, X incurred costs to perform work in conjunction with a heavy
maintenance visit on the airframe of Aircraft 2. The heavy maintenance visit on Aircraft
2 involved all of the same work described in Situation 1. In addition, X
found significant
wear and corrosion of fuselage skins of Aircraft 2 that necessitated more extensive

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work than was performed on Aircraft 1. Namely, X decided to remove all of the skin
panels on the belly of Aircraft 2's fuselage and replace them with new skin panels. The
replaced skin panels represented a significant portion of all of the skin panels of Aircraft
2, and the work performed materially added to the value of the airframe.
Because Aircraft 2 was already out of service and its airframe disassembled for
the heavy maintenance visit, X also performed certain modifications to the airframe.
These modifications involved installing a cabin smoke and fire detection and
suppression system, a ground proximity warning system, and an air phone system to
enable passengers to send and receive voice calls, faxes, and other electronic data
while in flight.
Situation 3
Also in 2000, X decided to make substantial improvements to Aircraft 3, which
was 22 years old and nearing the end of its anticipated useful life, for the purpose of
increasing its reliability and extending its useful life. X=s improvement of Aircraft 3
involved many modifications to the structure, exterior, and interior of the airframe. The
modifications included removing all the belly skin panels on the aircraft=s fuselage and
replacing them with new skin panels; replacing the metal supports under the lavatories
and galleys; removing the wiring in the leading edges of both wings and replacing it with
new wiring; removing the fuel tank bladders, harnesses, wiring systems, and connectors
and replacing them with new components; opening every lap joint on the airframe and
replacing the epoxy and rivets used to seal the lap joints with a non-corrosive sealant
and larger rivets; reconfiguring and upgrading the avionics and the equipment in the
cockpit; replacing all the seats, overhead bins, sidewall panels, partitions, carpeting,

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windows, galleys, lavatories, and ceiling panels with new items; installing a cabin smoke
and fire detection system, and a ground proximity warning system; and painting the
exterior of the aircraft. The work performed on Aircraft 3 also included modifications
necessary to terminate every aging aircraft AD applicable to Aircraft 3.
In order to upgrade the airframe to the desired level, X performed much of the
same work that would be performed during a heavy maintenance visit (as described in
Situation 1). The result of the work performed on Aircraft 3 was to materially increase
the value of the airframe and substantially prolong its useful life.
LAW
Section 162 and ' 1.162-1(a) of the Income Tax Regulations allow a deduction
for all the ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including Aincidental repairs.@
Section 1.162-4 allows a deduction for the cost of incidental repairs that neither
materially add to the value of the property nor appreciably prolong its useful life, but
keep it in an ordinarily efficient operating condition. However, ' 1.162-4 also provides
that the cost of repairs in the nature of replacements that arrest deterioration and
appreciably prolong the life of the property must be capitalized and depreciated in
accordance with ' 167.
Section 263(a) provides that no deduction is allowed for (1) any amount paid out
for new buildings or permanent improvements or betterments made to increase the
value of any property or estate or (2) any amount expended in restoring property or in
making good the exhaustion thereof for which an allowance has been made. See also
' 1.263(a)-1(a).

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Section 1.263(a)-1(b) provides that capital expenditures include amounts paid or
incurred to (1) add to the value, or substantially prolong the useful life, of property
owned by the taxpayer, or (2) adapt property to a new or different use. However, that
regulation also provides that amounts paid or incurred for incidental repairs and
maintenance of property within the meaning of ' 162 and ' 1.162-4 are not capital
expenditures under ' 1.263(a)-1.
Section 263A provides that the direct and indirect costs properly allocable to real
or tangible personal property produced by the taxpayer must be capitalized. Section
263A(g)(1) provides that, for purposes of ' 263A, the term Aproduce@ includes
construct, build, install, manufacture, develop, or improve.
The United States Supreme Court has specifically recognized that the Adecisive
distinctions [between capital and ordinary expenditures] are those of degree and not of
kind,@ and a careful examination of the particular facts of each case is required.
Deputy v. du Pont, 308 U.S. 488, 496 (1940), quoting Welch v.
Helvering, 290 U.S.
111, 114 (1933). To determine whether certain costs should be classified as capital
expenditures or as repair and maintenance expenses, Ait is appropriate to consider the
purpose, the physical nature, and the effect of the work for which the expenditures were
made.@ American Bemberg Corp. v. Commissioner, 10 T.C. 361, 376 (1948), aff=d, 177
F.2d 200 (6th Cir. 1949).
Any properly performed repair, no matter how routine, could be considered to
prolong the useful life and increase the value of the property if it is compared with the
situation existing immediately prior to that repair. Consequently, courts have articulated
a number of ways to distinguish between deductible repairs and non-deductible capital

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improvements. For example, in Illinois Merchants Trust Co. v. Commissioner, 4 B.T.A.
103, 106 (1926), acq., V-2 C.B. 2, the court explained that repair and maintenance
expenses are incurred for the purpose of keeping the property in an ordinarily efficient
operating condition over its probable useful life for the uses for which the property was
acquired. Capital expenditures, in contrast, are for replacements, alterations,
improvements, or additions that appreciably prolong the life of the property, materially
increase its value, or make it adaptable to a different use. In Estate of Walling v.
Commissioner, 373 F.2d 190, 192-193 (3
rd
Cir. 1966), the court explained that the
relevant distinction between capital improvements and repairs is whether the
expenditures were made to Aput@ or Akeep@ property in ordinary efficient operating
condition. In Plainfield-Union Water Co. v. Commissioner, 39 T.C. 333, 338 (1962),
nonacq. on other grounds, 1964-2 C.B. 8., the court stated that if the expenditure
merely restores the property to the state it was in before the situation prompting the
expenditure arose
and does not make the property more valuable, more useful, or
longer-lived, then such an expenditure is usually considered a deductible repair. In
contrast, a capital expenditure is generally considered to be a more permanent
increment in the longevity, utility, or worth of the property. The Supreme Court=s
decision in INDOPCO Inc. v. Commissioner, 503 U.S. 79 (1992) does not affect these
general principles. See Rev. Rul. 94-12, 1994-1 C.B. 36; Ingram Industries, Inc. v.
Commissioner, T.C.M. 2000-323.
Even if the expenditures include the replacement of numerous parts of an asset,
if the replacements are a relatively minor portion of the physical structure of the asset,
or of any of its major parts, such that the asset as whole has not gained materially in

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value or useful life, then the costs incurred may be deducted as incidental repairs or
maintenance expenses. See Buckland v. United States, 66 F.Supp. 681, 683 (D. Conn.
1946) (costs to replace all window sills in factory building were deductible repairs). See
also, e.g., Libby & Blouin Ltd. v. Commissioner, 4 B.T.A. 910 (1926) (costs to replace all
the tubing in sugar evaporator, which were small parts in a large machine, were
deductible repairs). The same conclusion is true even if such minor portion of the asset
is replaced with new and improved materials. See, e.g.
, Badger Pipeline v.
Commissioner, T.C.M. 1997-457 (costs to replace 1,000 feet of pipeline in a 25-mile
section of pipeline were deductible repairs, regardless of whether the new pipe was of
better quality or has a longer life).
If, however, a major component or a substantial structural part of the asset is
replaced and, as a result, the asset as a whole has increased in value, life expectancy,
or use then the costs of the replacement must be capitalized. See, e.g.
, Denver & Rio
Grande Western R.R. Co. v. Commissioner, 279 F.2d 368 (10th Cir. 1960) (costs to
replace major portion of a viaduct - all of the floor planks and 85-90% of the stringers -
were capital expenditures); P. Dougherty Co. v. Commissioner, 159 F.2d 269, 272 (4th
Cir. 1946) (costs to replace entire stern section of barge with new materials were capital
expenditures); Vanalco Inc. v. Commissioner, T.C.M. 1999-265 (cost to replace the cell
lining, an essential and substantial component of the cell, was required to be
capitalized); Stark v. Commissioner, T.C.M. 1999-1 (cost to replace building roof were
capital expenditures); Rev. Rul. 88-57, 1988-2 C.B. 36, modified by Rev. Rul. 94-38,
1994-1 C.B. 35 (costs to perform major cyclical rehabilitations on railroad freight train

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cars as part of a plan of rehabilitation in which all of the structural components were
either reconditioned or replaced were capital expenditures).
In addition, although the high cost of the work performed may be considered in
determining whether an expenditure is capital in nature, cost alone is not dispositive.
Compare R.R.
Hensler, Inc. v. Commissioner, 73 T.C. 168, 177 (1979), acq. in result,
1980-2 C.B. 1 (the fact that taxpayer=s expense was large does not change its character
as ordinary); Buckland at 683 (replacements of relatively minor proportions of the entire
physical asset constitute repairs even where high in cost); and American Bemberg, 10
T.C. 361 (1948) (deduction allowed for drilling and grouting to prevent cave-ins even
though the total cost of the expenditures exceeded $1.1 million), with Wolfsen Land &
Cattle Co. v. Commissioner, 72 T.C. 1, 17 (1979) (costs to dragline an irrigation ditch
were capital expenditures, in part, because they could be as high as the cost to
construct a new ditch); and Stoeltzing v. Commissioner, 266 F.2d 374, 376 (3d Cir.
1959) (expenditures could not be incidental repairs because they exceeded by almost
200% the cost of the building).
Similarly, the fact that a taxpayer is required by a regulatory authority to make
certain repairs or to perform certain maintenance on an asset in order to continue
operating the asset in its business does not mean that the work performed materially
increases the value of such asset, substantially prolongs its useful life, or adapts it to a
new use. See, e.g., Midland Empire Packing Co. v. Commissioner, 14 T.C. 635
(1950), acq., 1950-2 C.B. 3 (costs of applying concrete liner to basement walls and
floors in order to satisfy federal meat inspectors were deductible repairs); L&L Marine
Service Inc. v. Commissioner, T.C.M. 1987-428 (work performed on barges that was

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necessary to enable the barges to continue to qualify for sea duty was deductible
repair).
The characterization of any cost as a deductible repair or capital improvement
depends on the context in which the cost is incurred. Specifically, where an
expenditure is made as part of a general plan of rehabilitation, modernization, and
improvement of the property, the expenditure must be capitalized, even though,
standing alone, the item may be classified as one of repair or maintenance. United
States v. Wehrli, 400 F.2d 686, 689 (10th Cir. 1968). Whether a general plan of
rehabilitation exists, and whether a particular repair or maintenance item is part of it, are
questions of fact to be determined based upon all the surrounding facts and
circumstances, including, but not limited to, the purpose, nature, extent, and value of
the work done. Id. at 690. The existence of a written plan, by itself, is not sufficient to
trigger the plan of rehabilitation doctrine. See Moss v. Commissioner, 831 F.2d 833,
842 (9th Cir. 1987); Vanalco v. Commissioner, T.C.M. 1999-265.
In general, the courts have applied the plan of rehabilitation doctrine to require a
taxpayer to capitalize otherwise deductible repair and maintenance costs where the
taxpayer has a plan to make substantial capital improvements to property and the
repairs are incidental to that plan. See, e.g.
, California Casket Co. v. Commissioner, 19
T.C. 32 (1952), acq., 1953-1 C.B. 3 (costs of repairing the foundation although not in
the original plan became, when undertaken, incidental to and involved in the plan of
completely renovating and remodeling an old warehouse building); Stoeltzing at 377
(costs to renovate old building by shoring up floors; constructing steps, landing and new
driveway; replacing wiring and plumbing; installing new roof; plastering; insulating;

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performing carpentry work; patching the gutters; and removing rubbish must be
capitalized as part of plan of rehabilitation); Bank of Houston v. Commissioner, T.C.M.
1960-110 (costs incurred for various repairs incident to the reconstruction and
renovation of a bank building must be capitalized as part of a general plan of
rehabilitation).
On the other hand, the courts and the Service have not applied the plan of
rehabilitation doctrine to situations where the plan did not include substantial capital
improvements and repairs to the same asset,
the plan primarily involved repair and
maintenance items, or the work was performed merely to keep the property in an
ordinarily efficient operating condition. See, e.g.
, Moss at 840 (repairs incurred in
conjunction with a hotel remodeling project not required to be capitalized as part of a
plan of rehabilitation because the project=s capital expenditures were not of the nature
or scope necessary to trigger the plan of rehabilitation doctrine); Schroeder v.
Commissioner, T.C.M. 1996-336 (costs of renovating barns were not required to be
capitalized as part of a plan of rehabilitation where most of the renovation costs were
repairs and maintenance to keep the barns in an efficient operating condition); Rev.
Rul. 70-392, 1970-2 C.B. 33 (costs incurred to relocate existing capital assets in order
to install new assets intended to increase a utility=s distribution voltage were not
required to be capitalized as part of a general plan of rehabilitation because the
relocation merely kept the existing assets in an ordinarily efficient operating condition).
ANALYSIS
In Situation 1, the heavy maintenance visit on Aircraft 1 primarily involved
inspecting, testing, servicing, repairing, reconditioning, cleaning, stripping, and

13
repainting numerous airframe parts and components. The heavy maintenance visit did
not involve replacements, alterations, improvements, or additions to the airframe that
appreciably prolonged its useful life, materially increased its value, or adapted it to a
new or different use. Rather, the heavy maintenance visit merely kept the airframe in
an ordinarily efficient operating condition over its anticipated useful life for the uses for
which the property was acquired. See Illinois Merchant Trust Co.
at 106; Estate of
Walling at 192-193; Ingram Industries, Inc. at 538-539. The fact that the taxpayer was
required to perform the heavy maintenance visit to maintain its airworthiness certificate
does not affect this determination. See Midland Empire Packing
at 642.
Although the heavy maintenance visit did involve the replacement of numerous
airframe parts with new parts, none of these replacements required the substitution of
any (or a significant portion of any) major components or substantial structural parts of
the airframe so that the airframe as a whole increased in value, life expectancy, or use.
Compare Buckland
at 683 with P. Dougherty at 272. Thus, the facts in Situation 1 are
distinguishable from those in Rev. Rul. 88-57 in which all of the structural components
of a railroad freight car were either reconditioned or replaced so that the car was
restored to a Alike new@ condition with a new, additional service life of 12 to 14 years.
Moreover, the heavy maintenance visit also did not restore the airframe, or make good
exhaustion for which an allowance had been made, within the meaning of ' 263(a)(2).
In order to have a restoration under ' 263(a)(2), much more extensive work would have
to be done so as to substantially prolong the useful life of the airframe. See Denver &
Rio Grande at 373. Thus, the costs of the heavy maintenance visit constitute expenses
for incidental repairs and maintenance under '1.162-4.

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Finally, the costs of the heavy maintenance visit are not required to be
capitalized under '' 263 or 263A as part of a plan of rehabilitation, modernization, or
improvement to the airframe. Because the heavy maintenance visit involved only
repairs for the purpose of keeping the airframe in an ordinarily efficient operating
condition, it did not include the type of substantial capital improvements necessary to
trigger the plan of rehabilitation doctrine. See Schroeder v. Commissioner
, T.C.M.
1996-336; Moss at 842. Accordingly, the costs incurred by X for the heavy
maintenance visit in Situation 1 may be deducted as ordinary and necessary business
expenses under '162.
In Situation 2, in addition to performing all of the work described in Situation 1
on
Aircraft 2, X replaced all of the skin panels on the belly of the fuselage and installed a
cabin smoke and fire detection and suppression system, a ground proximity warning
system and an air phone system. Because the replacement of the skin panels involved
replacing a significant portion of the airframe=s skin panels (which in the aggregate
represented a substantial structural part of the airframe) thereby materially adding to
the value of and improving the airframe, the cost of replacing the skin panels must be
capitalized. See Vanalco, T.C.M. 1999-265; P.
Dougherty at 272. In addition, the
additions and upgrades to Aircraft 2 in the form of the fire protection, air phone, and
ground proximity warning systems must be capitalized because they materially
improved the airframe. See Phillips and Easton Supply Co. v. Commissioner, 20 T.C
455, 460 (1953). Accordingly, the costs incurred by X for labor and materials allocable
to these capital improvements must be treated as capital expenditures under ' 263.
Moreover, because the improvement of property constitutes production within the

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meaning of ' 263A(g)(1), X is required to capitalize under ' 263A the direct costs and a
proper share of the allocable indirect costs associated with these improvements.
Further, the mere fact that these capital improvements were made at the same
time that the work described in Situation 1 was performed on Aircraft 2 does not require
capitalization of the cost of the heavy maintenance visit under the plan of rehabilitation
doctrine. Whether a general plan of rehabilitation exists is a question of fact to be
determined based on all the facts and circumstances. See Wehrli at 690. X
=s plan in
Situation 2 was not to rehabilitate Aircraft 2, but merely to perform discrete capital
improvements to the airframe. See Moss at 839; Schroeder v. Commissioner, T.C.M.
1996-336; Rev. Rul. 70-392. For this reason, the facts of Situation 2 are
distinguishable from Rev. Rul. 88-57, which involved a major rehabilitation that
constituted a plan of rehabilitation undertaken near the end of the freight car=s life for
the purpose of restoring it to a Alike new@ condition. Accordingly, the costs of the work
described in Situation 1 are not part of a general plan of rehabilitation, modernization,
or improvement to the airframe. The costs incurred by X for the work performed on
Aircraft 2 must be allocated between capital improvements, which must be capitalized
under '' 263 and 263A, and repairs and maintenance, which may be deducted under
' 162.
In Situation 3, X
is required to capitalize under ' 263 the costs of all the work
performed on Aircraft 3. The work in Situation 3 involved replacements of major
components and significant portions of substantial structural parts that materially
increased the value and substantially prolonged the useful life of the airframe. See P.
Dougherty at 272 and Rev. Rul. 88-57. In addition, the value of Aircraft 3 was

16
materially increased as a result of material additions, alterations and upgrades that
enabled X to operate Aircraft 3 in an improved way. See Dominion Resources, 48 F.
Supp. 2d 527, 553. In contrast to Situation 1, the extensiveness of the work performed
on Aircraft 3 constitutes a restoration within the meaning of '263(a)(2). See, e.g.
Denver & Rio Grande at 373.
X performed much of the same work on Aircraft 3 that would be performed
during a heavy maintenance visit (as described in Situtation 1) (ASituation 1-type work@).
Although these costs, standing alone, generally are deductible expenses under ' 162,
in this context, they are incurred as part of a general plan of rehabilitation,
modernization, and improvement to the airframe of Aircraft 3 and X is required to
capitalize under '' 263 and 263A the costs of that work. See Wehrli at 689-90. In this
situation, X planned to perform substantial capital improvements to upgrade the
airframe of Aircraft 3 for the purpose of increasing its reliability and extending its useful
life. See Rev. Rul. 88-57. The Situation 1-type work was incidental to X=s plan to
upgrade Aircraft 3. See California Casket at 38. The effect of all the work performed on
Aircraft 3, including the inspection, repair, and maintenance items, is to materially
increase the value of the airframe and substantially prolong its useful life. Thus, all the
work performed by X on Aircraft 3 is part of a general plan of rehabilitation,
modernization, and improvement to the airframe and the costs associated with this work
must be capitalized under ' 263. Further, because the improvement of the airframe
constitutes production of property within the meaning of ' 263A(g)(1), X is required to
capitalize under ' 263A the direct costs and a proper share of the allocable indirect
costs associated with this improvement plan.

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The conclusions in this ruling would be the same whether X transported only
freight or only passengers.
HOLDINGS
Costs incurred by a taxpayer to perform work on its aircraft airframe as part of a
heavy maintenance visit generally are deductible as ordinary and necessary business
expenses under ' 162. However, costs incurred in conjunction with a heavy
maintenance visit must be capitalized to the extent they materially add to the value of,
substantially prolong the useful life of, or adapt the airframe to a new or different use.
In addition, costs incurred as part of a plan of rehabilitation, modernization, or
improvement must be capitalized.
APPLICATION
Any change in a taxpayer's method of accounting 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 its method of
accounting to conform with the holding in this revenue ruling must follow the automatic
change in accounting method provisions of Rev. Proc. 99-49, 1999-52 I.R.B. 725,
provided the change is made for the first taxable year ending after January 16, 2001.
However, the scope limitations in section 4.02 of Rev. Proc. 99-49 do not apply unless
the taxpayer=s method of accounting for costs incurred to perform work on its aircraft
airframes is an issue pending, within the meaning of section 6.01(6) of Rev. Proc. 2000-
38, 2000-40 I.R.B. 310, at the time the Form 3115 is filed with the national office. If the
taxpayer is under examination, before an appeals office, or before a federal court with
respect to any income tax issue, the taxpayer must provide a copy of the Form 3115,

18
Application for Change in Accounting Method, to the examining agent, appeals officer,
or counsel for the government, as appropriate, at the same time that it files the copy of
the Form 3115 with the national office. The Form 3115 must contain the name(s) and
telephone number(s) of the examining agent(s), appeals officer, or counsel for the
government, as appropriate.
EFFECT ON OTHER DOCUMENTS
Rev. Proc. 99-49 is modified and amplified to include the prospective change in
accounting method in the APPENDIX. Rev. Rul. 88-57 is distinguished.
DRAFTING INFORMATION
The principal author of this revenue ruling is Merrill D. Feldstein of the Office of
Associate Chief Counsel (Income Tax and Accounting). For further information
regarding this revenue ruling, contact Ms. Feldstein or Beverly Katz on (202) 622-4950
(not a toll-free call).