Internal Revenue Service
Rev. Rul. 69-78
1969-1 C.B. 61
Caution: Modified by Rev. Rul. 75-137
Excavation costs of a water canal used as a conduit for circulating the
water to cool an electric utility's steam-plant condenser are capital
expenditures for intangible assets that do not have a determinable useful
life and hence are not subject to a depreciation allowance.
Rev. Rul. 69-78
Advice has been requested whether a taxpayer's costs for the excavation of
a cooling water canal may be depreciated under section 167 of the Internal
Revenue Code of 1954, under the circumstances described below.
The taxpayer, an electric utility company, initially excavated and
subsequently enlarged an open, unlined canal to serve as a conduit for its
steam-plant condenser cooling water circulating supply. The canal extends
several miles, through land held in fee by the taxpayer, from its
steam-electric generating plant site to a point of access with an open,
public body of water from which the required supply of cooling water is
withdrawn or replenished and to which, after circulation through the steam
condensers, the water is returned. Silting is not a problem in these
The steam-electric plant site so served can be substantially enlarged to a
greater potential capability. Upon enlargement of the steam generating
plant-through installation of additional or larger generating units, the
flow capacity of the existing canal will be increased by additional
excavation to accommodate the necessary increased cooling water volumes as
may be required from time to time.
Section 167(a) of the Code provides that a reasonable depreciation
deduction shall be allowed for the exhaustion, wear and tear, and
obsolescence of property used in a trade or business or of property held
for the production of income.
Section 1.167(a)-3 of the Income Tax Regulations provides that an
intangible asset may be the subject of a depreciation deduction allowance
if it is known from experience or other factors to be of use in the
business or in the production of income for only a limited period, the
length of which can be estimated with reasonable accuracy.
The mere fact that the original excavation for a cooling water canal is
associated with steam generators that have a determinable useful life does
not of itself establish that the canal has a determinable useful life. The
excavation costs will not be reincurred every time the generators are
retired and replaced. Similarly, any cost for subsequent enlargement of the
original canal to provide for increased cooling water volumes necessary for
larger or additional generating units, will not be reincurred every time
the additional or larger generators are retired and replaced. No other
facts are present in this case from which a determinable useful life could
Accordingly, in this case the costs incurred for the initial excavation and
for any subsequent enlargement of the water cooling canal or channel are
capital expenditures for intangible assets. Furthermore, the useful life of
the canal is not reasonably susceptible to measurement and hence the costs
are not subject to a depreciation allowance.