This section contains the nature of the case and procedural background.

D proposed adjustments to P's returns for 1993 and 1994. D claimed that Engine Shop Visits (ESV) were capital expenses and not ordinary business expenses. If the ESVs were given the proper tax treatment FedEx would owe a combined additional $37,428,624 in taxes. P paid the disputed amount plus interest and then requested a refund. D refused the request and Ps filed this action. Ps operate a fleet of aircraft. Off-aircraft inspection, heavy maintenance, and repair of jet aircraft engines and APUs (auxiliary power units) were conducted in almost all instances by third-party vendors during ESVs after removal of the engines or the APUs from the aircraft. Ps swapped engines between aircraft on a regular basis to keep its fleet flying as only one engine was removed for maintenance at a time. The limits of engine and aircraft maintenance were hard and set by the FAA. Virtually all jet aircraft engines and APUs operated by FedEx in TY 1993 and TY 1994 were acquired or leased by Ps as installed components of completely assembled aircraft or as spares in connection with the acquisition of completely assembled aircraft. Ps acquired only a small number of jet aircraft engines or APUs in stand-alone purchases. They never purchased airframes separately; they purchased only airframes that were parts of completely assembled aircraft. None of the major airframe manufacturers also manufactured jet aircraft engines. The major engine manufacturers aggressively marketed their engines to air carriers during this period, providing incentives directly to the carriers to persuade them to equip their fleets with the manufacturers' engines. Ps timed their purchase of new engines and APUs to coincide with fleet purchases of new completely assembled aircraft and required the engine manufacturer to install the engines on the airframes so that the airframe manufacturer could deliver the required completely assembled aircraft to Ps. When Ps made a fleet purchase of used completely-assembled aircraft from another air carrier (often a passenger carrier), it also purchased spare engines and APUs because the selling air carrier would similarly have acquired spares at the time it acquired the aircraft. When a given model aircraft is retired, the engines that powered that model become obsolete. Ps maintained separate accounts on its books for each type of airframe and engine in its fleet. The aircraft industry itself defines 'maintenance' as 'actions required for restoring or maintaining an item in serviceable condition, including … overhaul.' An ESV is an 'overhaul.' The cost of such procedures ranged from .2% to 8.1% of the cost of the aircraft.

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