The Pima and Southern Railroad (PSRR) is a small railroad operating in rural Arizona. It exists by carrying freight to remote areas of the southwest. This year the PSRR needs to replace a 30-mile section of its track.

The PSRR has bids from a contractor to replace the track for the following amounts:

Cost of new track $ 5,000,000 Installing new track 3,000,000 Road bed grading and improvements 2,500,000 Removing old track (net of salvage) 1,500,000 Total $12,000,000 The old track is fully depreciated, and the cost shown is net of $200,000 salvage value received for the scrap metal. The new track is an improved type, and it is expected to last 35 to 40 years. The controller of PSRR, Casey Jones, comes to you and wants to know the tax treatment of the above expenditures. He specifically wants to know if any costs can be deducted or if all must be capitalized and written off over a period of years. He is also concerned about any potential problems with the uniform capitalization rules under §263A.

Prepare (in good form) a research memorandum to the file.