Opinion ID: 778819
Heading Depth: 4
Heading Rank: 1

Heading: The Cell as Separate Property

Text: 24 As a threshold matter, Vanalco argues that the tax court erred by treating each individual cell, rather than an entire cell line, as the appropriate unit of property for the purposes of determining the nature of the expenses incurred. This matters, Vanalco contends, because viewing the relevant unit of property as the entire cell line means that the cell linings under repair during 1992 and 1993 would have constituted a very small physical and economic component of that property. The relative cost of the relining could affect its tax treatment since under Libby & Blouin, Ltd. v. Comm'r, 4 B.T.A. 910, 914 (1926), [e]xpenditures for small parts of a large machine, in order to keep that machine in an efficient working condition ... are ... ordinary and necessary expenses and are not capital expenditures. 25 To support its position that the cell line is the appropriate unit of property, Vanalco points to the stipulated fact that, in the absence of substantial modifications to its electrical system, it could not conduct smelting on a sustained basis without a minimum of 112 cells in operation. This, according to Vanalco, demonstrates that it is the interconnected cell line, not the cell itself, that should be the focus of inquiry. In contrast, the Commissioner notes that there is nothing in the record to suggest that an individual cell could not operate by itself; rather, it appears that the need for a minimum of 112 operating cells stemmed from the design of Vanalco's electrical system, not the inherent characteristics of the cells themselves. Each cell could independently produce aluminum and was essentially interchangeable, capable of being withdrawn from the cell lines for repair purposes and replaced by a different cell. 26 The question, then, is whether the realities of Vanalco's smelting operations justify viewing the cells as independent units or constituent parts of a larger whole. The resolution of this issue requires drawing inferences from the stipulated facts, rather than arriving at an independent legal conclusion and therefore is subject to the clearly erroneous standard of review. The tax court, albeit not explicitly, found that the cells were sufficiently free-standing to constitute property separate and apart from the interconnected cell lines. We cannot say that this finding was clearly erroneous and therefore we reject Vanalco's contention that the cell line should be deemed the appropriate unit of property. 10 As to Vanalco's alternative argument that the cell, rather than the cell lining, should be viewed as the relevant property, it is clear that the tax court implicitly accepted this position — a judgment in which we concur. We therefore treat the cell as the relevant unit of property for the purposes of this appeal.