"Associated-Property" Regs Survive "Strong" Challenge

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The U.S. Court of Federal Claims upheld regulations requiring imputed interest on the basis of business property temporarily removed from service to be included in capitalized costs of property improvements.

Virginia electric and natural gas utility Dominion Resources Inc. replaced coal burners in two of its electric generating plants, which it temporarily took offline. The taxpayer and the IRS agreed that the direct costs related to the burners had to be capitalized under IRC [section] 263A and associated regulations, the uniform capitalization, or "unicap" rules. They also agreed that debt directly related to the replacement had to be included in that capitalization. They disagreed, however, on the amount of interest on other debt that had to be allocated to associated boilers and generating equipment and capitalized as an indirect cost of taking them out of service (the …