Court Opinion

ID: 9448158
Source: CourtListenerOpinion
Date Created: 2023-08-03 23:24:37.936145+00
Date Added: 2024-06-11T17:31:18.463202
License: Public Domain

*548MAJOR, Circuit Judge
(concurring in part and dissenting in part).
I concur in and approve of the majority opinion, except as to the item (almost $80,000) expended in the Fine Arts Building for the conversion of electricity from direct current (DC) to alternating current (AC). The Court sustains the Tax Court in its conclusion that this was a capital expenditure rather than “an ordinary and necessary expense paid or incurred during the taxable year in carrying on any trade or business * * With this conclusion I do not agree.
I agree that the fact that conversion was required by an ordinance of the City of Chicago is not determinative of the issue. It does, however, remove any doubt but that the expense was necessary. There remains the question as to whether it was ordinary. It has been held that an expense to be ordinary need not be of frequent occurrence but may occur only once. Welch v. Helvering, 290 U.S. 111, 114, 54 S.Ct. 8, 78 L.Ed. 212; Deputy et al. v. du Pont, 308 U.S. 488, 495, 60 S.Ct. 363, 84 L.Ed. 416.
The weakness of the Commissioner's position is demonstrated by his brief. In his statement of facts he relies upon the finding of the Tax Court, “Although the conversion did not increase the value of the building as such, it did affect the amount which a buyer would be willing to pay for the building.” I am not able to comprehend how it can be found that the value of the building was not increased and at the same time say that it could be sold for more money. Neither can I accept the argument, made here by the Commissioner, that the conversion increased the market value of the building in face of the finding that its value was not increased. The taxpayer testified that the market value was not increased and his testimony was supported by that of a qualified architect and engineer. If the market value was increased, as now argued, testimony to that effect would have been readily available. None, however, was offered by the Commissioner. Moreover, the fact, if such it be, that a buyer would be willing after conversion to pay more for the building is no indication that the cost was a capital expenditure. The same contention with equal plausibility could be advanced whether the expenditure was for a necessary and ordinary expense or whether it was for a capital improvement.
A reading of the cases reveals the difficulty courts have had in deciding the question under consideration. Each case must depend largely on its own facts. Jones v. Commissioner, 5 Cir., 242 F.2d 616, 620. In that case, the Court quotes from the Board of Tax Appeals as to the distinction between deductible repairs and non-deductible disbursements as follows (242 F.2d at page 619):
“ ‘A repair is an expenditure for the purpose of keeping the property in an ordinarily efficient operating condition. It does not add to the value of the property, nor does it appreciably prolong its life. It merely keeps the property in an operating condition over its probable useful life for the uses for which it was acquired. Expenditures for that purpose are distinguishable from those for replacements, alterations, improvements or additions which prolong the life of the property, increase its value, or make it adaptable to a different use.’ ”
In the instant case, the expenditure was for the purpose of keeping the property in an operating condition, did not add to its value (according to the finding of the Tax Court), did not appreciably prolong its life and did not make it adaptable to a different use.
Two cases, much relied upon by the government and cited in the majority opinion, are RKO Theatres, Inc. v. United States, Ct.Cl., 163 F.Supp. 598, and Woolrich Woolen Mills v. United States, 289 F.2d 444 (C.A.-3). The former case, written for the Court of Claims by Justice Reed (retired), reviews many cases and is often cited. In that case, the taxpayer in compliance with law provided new exit facilities and fire escapes from *549its theatre. The Court sustained the Commissioner’s holding that the expenditure was for a capital improvement. In distinguishing eases relied upon by the taxpayer, the Court stated (163 F.Supp. at page 602):
“The additions and changes were not in any sense a repair or replacement of existing facilities. They were permanent changes designed to make it possible to carry on a business for profit.”
In the instant case, the conversion was only the replacement of existing facilities and was not designed to make it possible to carry on a business for profit. That was already being done. On the same page, the Court stated:
“This was not a repair, ‘a substitution of new parts or restoration of certain parts of a given whole,’ but a capital improvement made to increase the value of the property for use in the taxpayer’s theatre business.”
Again, in the instant case, there was only a substitution of new facilities for the old, not an improvement designed to increase the value of the building for the use to which it was put.
The Woolrieh case is also distinguishable on its facts. There, the expenditure was for a filtration plant, constructed in compliance with a state law, for treatment of waste from a woolen mill. The plant consisted of a building with its contents located approximately one-third of a mile from taxpayer’s mill. The Court in holding this to be a capital expenditure distinguished cases relied upon by the taxpayer as follows (page 448):
“Those cases involved outlays of moneys for alterations of existing structures which, on the facts present in those cases, the Tax Court held to constitute repairs. We are not confronted here with a similar situation.”
The situation which did not exist in that case is present here where there was the alteration of an existing structure and the substitution of a' new facility for the old which served the same purpose without increasing the value of the building or the taxpayer’s income derived therefrom.
I would hold that the conversion expenditure was a necessary and ordinary expense and reverse the Tax Court in that respect.