1582 (a) of the Code. Insofar as a bank that does not meet the definition of section 581 of the Code is concerned, deductions for losses on securities are to be treated as provided in section 165 of the Code. See section 582 (a) of the Code and Revenue Ruling 68-524. Losses on all other items that are excluded from the loan base of banks using the uniform reserve ratio method of determining additions to a reserve for bad debts are not to be charged against the reserve but may be deducted as a specific debt loss under section 166 of the Code. See Revenue Ruling 68-3. SEC. 13. EFFECT ON OTHER DOCUMENTS. Revenue Ruling 63-122 is hereby clarified. Revenue Ruling 65-92, as supplemented by Revenue Ruling 66-26, and as modified by Revenue Ruling 68-524, is hereby further supplemented. Indemnifying payments made by a guarantor of a loan to his partner in a partnership are not deductible under section 166 of the Code where the proceeds of such loan were used to purchase the guarantor's partnership interest. 26 CFR 1.166-8: Losses of guarantors, endorsers, and indemnitors. Rev. Rul. 68-616 Advice has been requested whether in the circumstances described below, payments made by the guarantor of a loan in discharge of his obligation as such are deductible under section 166 (a) of the Internal Revenue Code of 1954 by reason of section 166 (f) of the Code. Partner A purchased the capital interest of partner B in the AB partnership with money borrowed from a finance company. B became guarantor on A's loan and four years later A defaulted on the loan. B, as guarantor, paid the balance due. Section 166 of the Code provides, in part, as follows: (a) GENERAL RULE.— (1) WHOLLY WORTHLESS DEBTS.-There shall be allowed as a deduction any debt which becomes worthless within the taxable year. (f) GUARANTOR OF CERTAIN NONCORPORATE OBLIGATIONS.-A payment by the taxpayer (other than a corporation) in discharge of part or all of his obligation as guarantor, endorser, or indemnitor of a noncorporate obligation the proceeds of which were used in the trade or business of the borrower shall be treated as a debt becoming worthless within such taxable year for purposes of this section (except that subsection (d) shall not apply), but only if the obligation of the borrower to the person to whom such payment was made was worthless (without regard to such guaranty, endorsement, or indemnity) at the time of such payment. (Emphasis added.) The requirement contained in section 166 (f) of the Code, as well as section 1.166-8 of the Income Tax Regulations, that the proceeds of the obligation be used in the trade or business of the borrower, is considered by the Internal Revenue Service to refer to the use of the proceeds of the obligation in the normal operation of the trade or business of the borrower and not to his acquisition of an additional capital interest in that trade or business. Thus, it is held that B's payment does not qualify under section 166 (f) of the Code, since the proceeds of A's obligation have not been used in A's trade or business but, rather, were used to purchase B's capital interest in the partnership. If, in fact, the debt that B acquired upon payment of the balance due on A's loan was worthless, the treatment of such payment would be determined by the nonbusiness bad debt provisions of section 166 (d) of the Code. In the case of Max Axelrod v. Commissioner, 320 Fed. (2d) 327 (1963), reversing 37 T.C. 1053 (1962), the United States Court of Appeals for the Sixth Circuit held that section 166 (f) of the Code was applicable in a factual situation substantially identical to that involved here. Although certiorari was not applied for in the Max Axelrod case, the decision will not be followed as a precedent in the disposition of similar cases. SECTION 167.-DEPRECIATION 26 CFR 1.167 (a)-1: Depreciation in general. Whether a corporation is entitled to depreciation deductions with respect to an industrial project the legal title to which is in a political subdivision of a State. See Rev. Rul. 68-590, page 66. 26 CFR 1.167 (a)-1: Depreciation in general. Treatment of physical improvements made on state highway rightof-way. See Rev. Rul. 68-607, page 115. 26 CFR 1.167 (a)-1: Depreciation in general. Application of section 3.05, Part II of Revenue Procedure 62-21 in cases in which there are additions, retirements, or replacements of assets to an account that had previously justified a shorter than guideline class life. See Rev. Proc. 68-27, page 911. 26 CFR 1.167(a)-1: Depreciation in General. Proper classification, within the guideline classes of Revenue Procedure 62-21, C.B. 1962-2, 418, of certain buildings (referred to as sawmill buildings, planing buildings, and dry-kiln buildings) owned and used by taxpayers in the sawmill business. See Rev. Proc. 68-35, page 921. 26 CFR 1.167 (a)-1: Depreciation in general. Procedure for making adjustments prior to taxable year ended May 8, 1967, to the depreciation allowances for railroad track when required adjustments are to be made for recovered usable track materials. See Rev. Proc. 68-46, page 961. The original costs of dredging a slip during the construction of a pier facility are not depreciable; however, periodic redredgings are depreciable intangible assets with useful lives measurable by the frequency of redredging if the period of usefulness exceeds one year. 26 CFR 1.167(a)-3: Intangibles. Rev. Rul. 68-483 Advice has been requested whether the initial cost of dredging a slip on land owned by a taxpayer during its construction of a pier facility, and the subsequent redredging costs necessitated by silting, represent depreciable assets. The taxpayer incurred an initial cost of dredging a slip during its construction of a pier facility for use in its business of building, converting, and repairing ocean going ships. The slip for the pier was dredged to an 18 foot depth at the inshore line, and a 30 foot depth at the channel line. The taxpayer owns the land underlying the pier facility, including the dredged slip, in fee. Due to continuing accumulations of silt in the river, the slip is redredged every three years to preserve the initially dredged area. Section 167 of the Code provides as follows: (a) General Rule.-There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) (1) of property used in the trade or business, or Section 1.167 (a)-2 of the Income Tax Regulations provides, in pertinent part, that the depreciation allowance does not apply to land apart from the improvements or physical development added to it. When an expenditure relates to an improvement or physical development added to the land, it may be subject to a depreciation allowance if the property meets all the requirements necessary for application of the depreciation deduction. Section 1.167 (a)-3 of the regulations provides, in pertinent part, the following rule for intangible assets used in the trade or business or in the production of income: If an intangible asset 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 such an intangible asset may be the subject of a depreciation allowance. * * * The dredging or deepening of a river channel is an alteration of the land underlying the river, and, because of the nature of this land alteration, the cost of the dredging is an intangible asset whether the taxpayer owns the land in fee or has lesser rights in and to the land. The mere fact that a dredged river channel is associated with a depreciable pier does not establish a useful life for the dredging since the dredging costs are normally independent of the pier and will not ordinarily be reincurred with each replacement or reconstruction of the pier itself. See Revenue Ruling 66-71, C.B. 1966-1, 44, and Revenue Ruling 68-280, C.B. 1968-1, 20. Whether or not an intangible asset, or a tangible asset, is depreciable for Federal income tax purposes depends upon the determination that the asset is actually exhausting, and that such exhaustion is susceptible of measurement. General Equipment Co. v. Commissioner 2 B.T.A. 804 (1925). Dredging improvements generally have an indefinite period of usefulness. However, in those instances where particular conditions exist, such as silting, there may be, based on the particular facts and circumstances, grounds for depreciating dredging costs. Commodore's Point Terminal v. Commissioner 18 B.T.A. 385 (1929), acquiescence, C.B. IX-2, 13 (1929). In this case, since the taxpayer maintains a continuing program for the periodic redredging of the slip, the initial dredged area undergoes no actual exhaustion, and is, in fact, indefinitely preserved by the redredging. The periodic redredgings, however, as evidenced by the necessity for redredging every three years, represent land improvements that are exhausting. The period of the usefulness of the redredgings is susceptible of measurement, and is determinable by the frequency of the need to redredge. The redredging costs, therefore, represent depreciable intangible assets since the period of their usefulness extends beyond a one year period. Accordingly, under the circumstances of this case, the costs of initially dredging the slip on the taxpayer's land represents nondepreciable intangible assets. The costs of redredging, however, represent depreciable intangible assets with useful lives measurable by the frequency of the need to redredge since the period of the usefulness of the redredgings exceeds a period of one year. A subsidiary that assumes its parent's obligation in connection with an unrelated party's covenant not to compete with the subsidiary may deduct the payments thereon over the useful life of the covenant under section 167 of the Code. 26 CFR 1.167 (a)-3: Intangibles. Rev. Rul. 68-636 Advice has been requested whether a subsidiary corporation may deduct payments made pursuant to a covenant not to compete with it where the obligation for the payments was contracted by its parent corporation and assumed by the subsidiary. In a transaction at arm's-length, M corporation purchased from A, an individual, all of the issued and outstanding capital stock of X, corporation. Separately from its agreement to purchase X's stock, M negotiated with A for a covenant by A not to compete with X for 10 years in exchange for an additional consideration to be paid to A by M over the 10-year period. Without such a covenant, A could have established a competing business and M would not have obligated itself to pay the additional consideration. The covenant was expressly made assignable to X. The covenant was assigned by M to Xin exchange for X's assumption of M's obligation to pay A. A covenant not to compete that is separate from good will and has a limited useful life is an intangible depreciable asset. It may be assigned to the beneficiary thereof. Section 167 of the Internal Revenue Code of 1954; section 1.167 (a)-3 of the Income Tax Regulations; Gazette Telegraph Co. v. Commissioner, 19 T.C. 692 (1953), acquiescence, C.B. 1954-2, 4, affirmed 209 F.2d 926 (1954). Accordingly, under the circumstances of this case, where the subsidiary assumed and paid the obligation of its parent for the covenant not to compete, it may deduct the payments made by it over the 10-year life of the covenant under section 167 of the Code. 26 CFR 1.167(a)-3: Intangibles. Expenditures by public utilities to promote consumption of gas or electricity. See Rev. Rul. 68-561, page 117. 26 CFR 1.167 (a)-3: Intangibles. Determining the value of intangibles. See Rev. Rul. 68–609, page 327. A railroad may not transfer depreciation reserves between established accounts to reflect adjustments made by the Interstate Commerce Commission on its regular books of account; permanent auxiliary records must be maintained to reconcile each account. 26 CFR 1.167(a)-7: Accounting for depreciable property. (Also Section 1016; 1.1016-3.) Rev. Rul. 68-617 Advice has been requested whether a railroad corporation may for Federal income tax purposes transfer a portion of the depreciation reserve for its property account 53, Freight Train Cars, to the depreciation reserve for its depreciable property account 6, Bridges, Trestles and Culverts (classified in accordance with the Interstate Commerce Commission Uniform System of Accounts for Railroad Companies), under the circumstances described below. The Interstate Commerce Commission, using a longer useful life than the railroad (for Interstate Commerce Commission purposes), recomputed a depreciation reserve for the railroad's property account 53, Freight Train Cars. The Interstate Commerce Commission recommended transfer, and the railroad so transferred, to the depreciation reserve account for property account 6, Bridges, Trestles and Culverts, on its regular books of account, the difference between the recomputed reserve (which was less than the actual reserve for that account) and the actual reserve. Before the transfer, each of the reserve account balances properly reflected for Federal income tax purposes the adjustments to basis in respect of the account to which it related, under the provisions of section 1016 of the Internal Revenue Code of 1954 and the regulations thereunder, and there were no assets transferred, from, or to, either of the accounts. The railroad contended that for Federal income tax purposes it should be permitted to also transfer the same amount of reserve from |