Opinion ID: 778819
Heading Depth: 3
Heading Rank: 2

Heading: Floor Replacement Expenses

Text: 44 The tax court also held that Vanalco's costs in connection with replacing the tap end and center sections of various cell room floors constituted a capital expenditure. In arriving at this conclusion, the tax court emphasized the substantial nature of the repairs in question, the functional improvement created by replacing the brick floor with Fondag cement, and the fact that the improved floors made the property more valuable to Vanalco in its business. Vanalco I, 78 T.C.M. (CCH) at 257-58. Vanalco contends that the tax court erred because these repairs did not materially increase the value or prolong the life of its property.
45 Vanalco's primary argument is that, because it did not replace the entire floor in any of the cell rooms, it did not materially increase the value of the property and therefore the costs associated with the repairs should be deductible. 46 The resolution of this issue is complicated somewhat by the fact that the record does not disclose the precise dimensions of the repair work. Vanalco argues that the extent of the repairs was insubstantial, pointing to the fact that the tap end is approximately 25 percent of the cell room floor area and the bulk of expenditures during the tax years in question were for tap end repairs. In contrast, the Commissioner contends that in the rooms where both the tap end and center areas were repaired, almost 50 percent of the floor space was replaced. Vanalco contests this figure, stating that in the rooms where the center areas were repaired, the record suggests that only the areas around — and not under — the cells were replaced. The tax court did not definitively resolve this question; rather it based its conclusion that the repairs in question were substantial on the fact that between 1991 and 1995, Vanalco engaged in a project of replacing the brick floors in the tap end and center sections of all of its cell rooms with Fondag cement. 47 Thus, during the specific tax years in question, the most one could say is that it is likely that between 25 and 50 percent of the floors in cell rooms 10, 14, 16, 18, and 22 were replaced, as these rooms received repairs to both the tap end and center areas. In evaluating this figure, it must be kept in mind that the cells themselves took up a large portion of the center areas and were probably not moved during the repairs. In addition, with respect to rooms 8, 12, and 20, where only tap end or center area repairs were made, the extent of replacement was likely somewhere below 25 percent of the floor. 48 Vanalco argues that these repairs did not materially increase the value of the floors, citing several different cases for the proposition that only the replacement of an entire floor area, or something close thereto, constitutes a capital expense. See, e.g., Denver & Rio Grande W. R.R. v. Comm'r, 279 F.2d 368, 373 (10th Cir.1960) (ruling that the cost of replacing all the floor planks of a viaduct was a capital expenditure); Phillips & Easton Supply Co. v. Comm'r, 20 T.C. 455, 460, 1953 WL 64 (1953) (holding that the replacement of an entire building floor was a capital expenditure). These cases, however, do not articulate a bright line rule regarding the extent of repairs necessary to constitute a substantial replacement — in other words, they do not clearly indicate a threshold percentage beneath which the extent of repairs is considered too small to warrant capitalization. Given the facts of this case, we agree with the tax court that the repairs here were substantial enough materially to increase the value of the floors as a whole. This is especially true in light of the fact that during the period from 1991 to 1995, Vanalco was engaged in an ongoing process of floor replacement that resulted in significant repairs to the floors in every one of the cell rooms. 14 49 Moreover, the scope of repairs is not the only factor in characterizing costs as ordinary expenses or capital expenditures. The tax court was correct in concluding that the repairs to the cell room floors were capital in nature based on the enhanced functionality of the floors after the new portions were installed. In particular, we agree with the tax court that the use of Fondag cement provided significant functional benefits over the previous brick floors that materially increased their value. In contrast to brick, Fondag cement was easier to clean and repair, became electrically non-conductive in a shorter period of time, and wore down in a smoother pattern. This certainly would increase the value of the floor in the context of Vanalco's business, reducing costs associated with repair and mitigating the risk of injury. 50 Vanalco cites Hudlow, 30 T.C.M. (CCH) at 922-23, in support of its position that the floors' value was not increased, but that case is distinguishable on the facts. Specifically, the tax court in Hudlow concluded that the taxpayer did not replace the floor, but simply poured concrete over the pre-existing floor in a leased facility. Id. In determining that the concrete overlay did not materially increase the value of the floor, the tax court relied on its assessment that, although there was some functional value to having a sturdy floor with uniform thickness, that value was counterbalanced by the fact that the concrete eliminated drains that had previously been in the floor. Id. Here, there is no countervailing detriment weighing against the benefits of the Fondag cement. 51 Similarly, Vanalco's attempt to distinguish Phillips & Easton, 20 T.C. at 460, upon which the tax court relies, also fails. Although, as Vanalco points out, that case involved the replacement of an entire floor, in concluding that the replacement costs were capital expenditures, the tax court emphasized the fact that the old floor was thin and worn, while the new floor was thicker and made for heavy wear. Id. Likewise, in this case there is no dispute that the brick was replaced because the wear and tear caused by equipment traffic and the molten bath from the cells created a significant safety concern. The Fondag cement was selected because, after experimenting with other types of concrete, Vanalco concluded that it would provide the most satisfactory functional benefits. Accordingly, we agree with the tax court's determination that Vanalco's floor repair expenditures increased the property's value and were therefore capital in nature.
52 Vanalco's final argument is that the tax court erred because there is no evidence that the repairs in question prolonged the life of cell room floors. The tax court, however, did not rest its decision on whether the floor repairs resulted in prolonged life. Instead, it properly grounded its decision on the increased functional and material value conferred by the improvements. Since the tax court was not obligated to address the prolonged life issue, see 26 C.F.R. § 1.263(a) 1(b) (stating that expenses are not deductible if they add to the value, or substantially prolong the useful life of property (emphasis added)), there was no error.