For this assignment, you will be submitting a tax research memo regarding the scenario detailed below
The purpose of this assignment is for you to research the tax ramifications of capitalization.
The Relevant Facts, Specific Issues, and Conclusions sections of the memo should be thorough but concise. The key portion of the memo will be the Support section, which should be properly supported by appropriate regulation citations (be specific with section, number, paragraph, and subparagraph as applicable).
As this is a memo, and not a formal writing assignment, APA format is not required. Furthermore, there is no need to submit a title page or research page. Just substitute “Your Firm” at the top of the memo with your full name.
Prepare (in good form) a research memorandum to the file.
SCENARIO: The Pima and Southern Railroad (PSRR) is a small railroad operating in rural Arizona. It exists by carrying freight to remote areas of the southwest. This year the PSRR needs to replace a 30- mile section of its track. The PSRR has bids from a contractor to replace the track for the following amounts:
Cost of new track $5,000,000
Installing new track $3,000,000
Road bed grading and improvements $2,500,000
Removing old track ( net of salvage) $1,500,000
The old track is fully depreciated, and the cost shown is net of $200,000 salvage value received for the scrap metal. The new track is an improved type, and it is expected to last 35 to 40 years. The controller of PSRR, Casey Jones, comes to you and wants to know the tax treatment of the above expenditures. He specifically wants to know if any costs can be deducted or if all must be capitalized and written off over a period of years. He is also concerned about any potential problems with the uniform capitalization rules under § 263A.