[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1016-2]

[Page 63-64]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1016-2  Items properly chargeable to capital account.

    (a) The cost or other basis shall be properly adjusted for any 
expenditure, receipt, loss, or other item, properly chargeable to 
capital account, including the cost of improvements and betterments made 
to the property. No adjustment shall be made in respect of any item 
which, under any applicable provision of law or regulation, is treated 
as an item not properly chargeable to capital account but is allowable 
as a deduction in computing net or taxable income for the taxable year. 
For example, in the case of oil and gas wells no adjustment may be made 
in respect of any intangible drilling and development expense allowable 
as a deduction in computing net or taxable income. See the regulations 
under section 263(c).
    (b) The application of the foregoing provisions may be illustrated 
by the following example:

    Example: A, who makes his returns on the calendar year basis, 
purchased property in 1941 for $10,000. He subsequently expended $6,000 
for improvements. Disregarding, for the purpose of this example, the 
adjustments required for depreciation, the adjusted basis of the 
property is $16,000. If A sells the property in 1954 for $20,000, the 
amount of his gain will be $4,000.

    (c) Adjustments to basis shall be made for carrying charges such as 
taxes and interest, with respect to property (whether real or personal, 
improved or unimproved, and whether productive or unproductive), which 
the taxpayer elects to treat as chargeable to capital account under 
section 266,

[[Page 64]]

rather than as an allowable deduction. The term taxes for this purpose 
includes duties and excise taxes but does not include income taxes.
    (d) Expenditures described in section 173 to establish, maintain, or 
increase the circulation of a newspaper, magazine, or other periodical 
are chargeable to capital account only in accordance with and in the 
manner provided in the regulations under section 173.