MEMO TO THE FILE

Date: April 5, 2015

Preparer: Susan Smith

Client: Highland Golf Club

Subject: Greens Improvement Tax Treatment

Facts

As per conversation with Joe Smith at Highland Golf Club on April 1, the facts are as follows:

Highland Golf Club restructured their golf courses greens after withstanding severe hurricane damage. The
improvements included installing computer-controlled irrigation and drainage systems. The prior cost of constructing
the golf courses natural greens, without any dedicated irrigation system or other technology, was capitalized to
the cost of the land and therefore has not been depreciated for either book or tax purposes.

Issue

How should Highland Golf Club account for the recent greens restructuring costs for tax purposes?

Authorities

167

168

Federal Tax Regulation 1.167(a)-2

Rev. Rul. 2001-60, 2001-51 I.R.B. 587

Rev. Rul. 55-290, 1955-1 C.B. 320

Conclusion

The irrigation and drainage systems installed by Highland Golf Club are technological improvements that will
deteriorate over time. Therefore, they should be capitalized and depreciated as equipment and not capitalized as part
of the cost of the land. The depreciation should be calculated using MACRS. Other costs associated with preparing
and replacing the land itself should continue to be added to the cost of the land and will not be depreciated.

2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered
trademarks or trademarks of KPMG International. NDPPS 367263

1
Analysis

167(a) allows for the deduction of depreciation that reflects the normal use of and wear and tear on a businesss
property. 1.167(a)-2 distinguishes that 167 applies to land improvements but not to the cost of the land itself. Land
has an unlimited useful life and is therefore not depreciated. Rev. Rul. 55-290 determined that the construction costs
for golf course greens should be accounted for as land rather than as land improvements. However, this ruling does
not address greens with an embedded technology.

Rev. Rul. 2001-60, which modified and superseded Rev. Rul. 55-290, distinguishes between two types of golf course
greens: natural greens with no belowground technology and modern greens with belowground irrigation or
drainage systems. Rev. Rul. 2001-60 indicates that natural greens should continue to be accounted for per
Rev. Rul. 55-290 and therefore not be depreciated. In restructuring its greens and adding belowground irrigation and
drainage systems, Highland Golf Club has installed modern greens and replaced their previously natural greens.

Rev. Rul. 2001-60 discusses the deterioration of the equipment associated with drainage systems used in modern
greens (tiles, pipes, etc.) and goes on to define a 20-year useful life for these components of modern greens.
However, the costs of moving, grading, and shaping the soil to install the drainage system should continue to be
added to the value of the land and not be depreciated, consistent with 1.167(a)-2 and Rev. Rul. 55-290.

Per 168(b)(1), Highland Golf Club should depreciate the drainage/irrigation equipment costs using MACRS (i.e.,
200% declining-balance depreciation).

2015 KPMG LLP, a Delaware limited liability partnership and the U.S.
member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG International),
a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG
name, logo and cutting through complexity are registered trademarks
or trademarks of KPMG International. NDPPS 367263