FedEx v. Commissioner: the continuing debate over cyclical maintenance costs

Tax Executive, The,  Nov-Dec, 2003  by James L. Atkinson

Tags: Federal Express

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The district court found Plainfield-Union to be highly analogous to cyclical engine maintenance. The underground pipelines owned by the water company in Plainfield-Union had become partially clogged over time through their use in the ordinary course of the taxpayer's business. The Tax Court upheld the taxpayer's right to deduct costs that did no more than repair the damage that had occurred through such routine business operations. Similarly, the district court in FedEx found that the engines required cyclical maintenance as a foreseeable consequence of their having been used in routine flight operations. The FAA required that the engines undergo certain procedures after a prescribed period or amount of usage, because that usage necessarily inflicted wear and tear on the engine's components. Just as the taxpayer in Plainfield-Union was entitled to restore the pipeline to its condition immediately prior to the event necessitating that repair--i.e., routine business usage--so too was FedEx. The district court stated:

   The 'condition' necessitating the [maintenance] was
   the wear and tear an engine ... had sustained in
   powering FedEx's aircraft since a previous [maintenance
   visit]. Under this analysis, if an engine ...
   is in no better condition after a given [maintenance
   visit] than it was after the preceding [maintenance
   visit], the [maintenance visit] could not have improved
   the condition of the aircraft, and the court
   must conclude that the [maintenance visit] only
   corrected the damage sustained by the aircraft
   during the ordinary course of its operation. (44)

The court found as a factual matter that the maintenance visit did not increase the value of the aircraft, because the government had been able to show that at best the maintenance kept the value relatively flat over time.

The court also found that the maintenance did not extend the useful life of the aircraft. FedEx acquired the aircraft with the expectation that it would remain in service for 30 years and designed its maintenance program to keep the component parts--airframes and engines--in working order during that time. As in Ingram, the government was unsuccessful in arguing that the maintenance resulted in extending the useful life of the asset.

The district court thus concluded in FedEx that the company acquired its aircraft as a single unit with an expected economic life of 30 years, and that its maintenance program was designed to preserve, but not to extend that expected useful life. In the absence of evidence that the value of the aircraft was enhanced, (45) the taxpayer was permitted to currently deduct the maintenance costs as incidental repairs.

Into the Future

Although taxpayers should be careful not to assign too much importance to one district court opinion, especially pending a probable appeal by the IRS, the district court's opinion in FedEx reaffirms in a new context a number of established legal principles relating to repair costs. By focusing on these principles and not on the factual distinctions with prior authority, the district court took a step that may go a long way toward resolving the tax treatment of cyclical maintenance costs for air carriers and for other industries as well.