I couldn't read that Revenue Ruling without asking myself, "How many Poles does it take to deduct a new telephone pole?"  But what I got out of it was this:  

"If the retirement and removal of a depreciable asset occurs in connection with the installation or  production of a replacement asset, the costs incurred in removing the retired asset are not required to be capitalized under § 263(a) or 263A as part of the cost of the replacement asset."

But I still don't have a clear picture of what happened with your taxpayers.  Were they the ones who installed the original tenant improvements?  If so, have they been depreciating them?  Is there basis left?  And no, I'm not sure this matters.  

And of course, that Revenue Ruling is from 2000, and some of the rules on tenant improvements have changed since then, haven't they?  Do Sections 263 and 263A still apply?