Court Opinion

ID: 4617916
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:37:33.555459+00
Date Added: 2024-06-11T07:55:22.762267
License: Public Domain

EDWIN DUMBLE CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTEdwin Dumble Co. v. CommissionerDocket No. 13723.United States Board of Tax Appeals9 B.T.A. 591; 1927 BTA LEXIS 2551; December 15, 1927, Promulgated *2551  In determining whether expenditures made upon property to fit it for use are capital expenditures or deductible as ordinary and necessary expenses, the fact that there is no increase in the assessed valuation for local taxes does not establish them as deductible expenses.  M. Jablow, Esq., for the petitioner.  A. H. Fast, Esq., for the respondent.  STERNHAGEN *591  Deficiency of $456.93, income tax for the year 1920, and a deficiency of $677.02, income tax for the year 1921.  Respondent disallowed deductions made by petitioner in the sum of $3,720 for 1920 by reason of certain expenditures made upon a (1) freehold and upon a (2) leasehold; and in the sum of $1,756.32 for 1921 by reason of like expenditures upon the same (1) freehold and (2) leasehold, the respondent holding them capital expenditures in the first instance, and, in the second, deductible only as to an aliquot part for each year of the term; and by reason of (3) a reserve set up by petitioner for bad debts.  *592  FINDINGS OF FACT.  1.  Petitioner is a corporation engaged in the business of painting, cabinet making, and interior decoration.  In July, 1920, it bought a private*2552  house, No. 124 West 97th Street, New York, and proceeded to refashion it for its business.  To do this required painting the floors and walls, repapering, repairing the floors, building fireproof partitions, a fire escape, and small jobs of carpentry, and installing new electrical wiring to operate its sewing machines and pressing irons.  More or less frequent paintings of the floors were necessary in order to avoid injury to the fine silks and other draperies used in the business.  The total cost of these changes was $2,500 in 1920, and petitioner deducted that amount, less $220 allowed by respondent as depreciation, from its income-tax return that year.  Four hundred dollars (less $228 for depreciation) was deducted for similar reasons in petitioner's return for 1921.  New York City real estate tax bills for 1920 to 1924, inclusive, show the assessed valuation of this freehold to have been $13,000 in 1920 and to have remained the same through 1924.  2.  In October, 1920, petitioner obtained a five-year lease of a building, No. 2104 Broadway, New York.  Petitioner used the ground floor as a shop for its interior decoration business and rented the four upper floors as shops and*2553  living apartments.  On the expiration of the five-year term, petitioner renewed the lease for one year only.  The building was in bad condition when taken and the lease provided that the lessee make all repairs.  Petitioner made certain repairs to adapt the building to its purposes, such as painting, plastering, building partitions, and rewiring.  The total cost of these repairs for 1920 was $1,800, of which respondent allowed by way of deduction $360, or one-fifth, amortizing the expenditure over the term of the lease, five years.  Petitioner took, however, no deduction on this account subsequent to 1920.  Similar repairs made in 1921 amounted to $400, which respondent allowed.  Petitioner took nothing from the building when it surrendered possession at the end of the term, October, 1926.  3.  In 1920 1 petitioner suffered a loss of $3,489.43; in 1922, of $2,633; in 1923, of $3,012; in 1924, of $3,081; in 1925, of $2,936.  The average yearly amount of loss was 3 per cent of petitioner's gross sales for the respective years.  In certain previous years the annual loss had been proportionately greater.  Owing to the peculiar nature of the business and the consequent difficulty of*2554  utilizing materials originally intended for one customer in supplying another, the *593  hazard of loss through bad debts in this trade is greater than ordinary.  Petitioner deducted $3,489.40 as an addition to its reserve for bad debts in 1921, or 3 per cent of its gross sales for the year, $116,313.40.  OPINION.  STERNHAGEN: The expenditures made by petitioner for work and materials necessary to fit the freehold to its permanent use were not ordinary and necessary expenses of carrying on its trade or business within section 234(a)(1) of the Revenue Act of 1918 and the Revenue Act of 1921.  It may be that some part of the amount claimed was spent for ordinary recurring repairs, but such part is not in evidence and hence the entire amount must fall.  The mere fact that a permanent improvement does not immediately cause an increase to be made in the assessed valuation for local property-tax purposes does not justify its treatment as an ordinary and necessary expense.  The respondent allowed depreciation after treating the expenditure as capital.  This is sustained both for 1920 and 1921.  The same*2555  is true of the expenditures upon the leasehold property, and respondent is sustained.  The petitioner claims for 1921 a deduction in respect of bad debts which is not clear enough to act upon.  From the evidence it is impossible to find the amount of deduction properly allowable to petitioner or whether any part thereof has been disallowed by respondent.  Because of this uncertainty the respondent is sustained.  Judgment will be entered for the respondent.Considered by LANSDON, GREEN, and ARUNDELL.  Footnotes1. This is written "1922" in record, but evidently refers to 1920. ↩