Seufert Bros. Co. v. Commissioner

SEUFERT BROTHERS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Seufert Bros. Co. v. Commissioner Docket No. 19347. United States Board of Tax Appeals 14 B.T.A. 1023; 1929 BTA LEXIS 3004; January 7, 1929, Promulgated *3004 CAPITAL EXPENDITURE. - Where state officials laid out and proposed to construct a public highway through taxpayer's orchard that would have damaged and caused the abandonment of part of it and injured its irrigation system, and the taxpayer paid $5,000 to obtain the removal of the road to another location where such damage did not result, said payment of $5,000 was a capital expenditure and not an ordinary and necessary business expense for the year in which payment was made. Robert T. Jacob, Esq., for the petitioner. O. B. Bennett, Esq., for the respondent. MILLIKEN *1023 The taxpayer seeks a redetermination of a deficiency in income and profits taxes for the calendar year 1920 in the amount of $1,698.11. It is alleged that the Commissioner erred in refusing to allow a deduction of $5,000 as an ordinary and necessary business expense resulting from a payment by it to secure a change in the location of a public highway to prevent injury to its property. The Commissioner denied the deduction on the ground that the payment represented a capital expenditure. FINDINGS OF FACT. The taxpayer is a corporation organized under the laws of Oregon, *3005 with its principal office in The Dalles, Wasco County, Oreg. It is engaged in the fish and fruit canning and packing business at Seufert, Oreg., and in connection with its plant it owns extensive orchards of fruit trees, canning and packing buildings, attendants' buildings, *1024 barns, garages and office buildings necessary for its purposes. Irrigation ditches, canals and pipes have been located, constructed and run in and upon the property to supply water for the orchards. During the year 1919 or prior thereto the State Highway Commission of Oregon made a survey for the purpose of relocating the Dalles and Pendleton Highway and determined to run it through the properties of the taxpayer in such a way and place that considerable damage would have been occasioned by reason of the removal and abandonment of certain fruit trees and a portion of the orchard, destruction of irrigating ditches, and the digging of cust and construction of fills through the property. The orchard and cannery grounds were already divided by a double-track railroad and the proposed highway was to divide it also and parallel the railroad for a considerable distance, causing additional inconvenience. *3006 Upon learning of the proposed location, taxpayer's president endeavored to have the location changed so that it would run around the orchard and cannery grounds, thus obviating damage to the orchard and irrigation system, and the abandonment of a part of the orchard. Either route required a bridge to cross a creek which ran through taxpayer's property, but the route proposed by taxpayer required a higher bridge, which would cost an additional outlay of $5,000. Negotiations resulted in changing the location of the road as desired by taxpayer upon its payment in the year 1920 of the additional cost of $5,000, and the road and bridge were so constructed, resulting in no damage to taxpayer's orchard or irrigating system. Taxpayer had its own roads on its property sufficient to answer its purposes and shipped its products in carload lots from a railroad switch at its plant, and did not use the new highway for market or business purposes. Prior to its construction there was an old public highway which ran up to taxpayer's property line, but not through or over its property. The construction of the highway as finally located added no value to taxpayer's property, but the change*3007 in location saved a part of the orchard, prevented damage to the irrigation system, and other dangers and inconveniences, and the property was made more valuable by the construction of the road as desired by taxpayer than it would have been had the road been constructed as originally located. The change in location saved the taxpayer more than $5,000, which it would have cost to reconstruct the irrigation ditches, and the same amount in value of orchard saved from destruction and abandonment. The road was built from gasoline and license fees and taxes and not by local assessment against the property. The taxpayer donated the right of way through its property. *1025 OPINION. MILLIKEN: It seems clear to us that the expenditure of the $5,000 in question is not deductible as an ordinary and necessary business expense for the year 1920. Deductions are ordinarily allowed for such business expenses as are usual and necessary in the conduct of a taxpayer's business, which are current and have some relation to the production of income. It can not be logically said that a contribution to the cost of the road had anything whatever to do with the production of taxpayer's income, *3008 especially as its president testified that the road was a positive disadvantage. The payment was made to prevent a lasting injury and to preserve taxpayer's property permanently, and in that sense was a permanent improvement to the property. We have held in a number of cases that expenditures for permanent improvements are capital expenditures and not deductible as ordinary and necessary business expenses, and that it was not necessary that value be added to the property. In , the taxpayer was the owner of a mill village of 150 tenant houses for its employees, for which it had installed and was using a sewer system which was satisfactory. As a result of legislation it was compelled to tear out the system in use and put in another at a cost of $8,714.73, for which it claimed deduction as an ordinary and necessary business expense, and that it was not a capital expenditure because it did not enhance the value of its properties. The Commissioner and Board held that it was a permanent improvement and was not an ordinary and necessary business expense. In *3009 , expenditures made in preparation of farm lands for crop fertility were held capital expenditures and not current annual operating expenses. The expense of constructing tunnels under city streets to connect two business houses owned by the taxpayer was held to be a capital expenditure and not an ordinary and necessary business expense in . In , the business house of taxpayer had been remodeled and altered to suit its business purposes and for the expense of which it asked deduction as an ordinary and necessary business expense, but the Board held: 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*3010 an increase to be made *1026 in the assessed valuation for local property-tax purposes does not justify its treatment as an ordinary and necessary expense. * * * The case of , was where the taxpayer sought deduction as an ordinary and necessary business expense for expenditures made by it in paving the streets of its mill village, but the Board held them capital expenditures, as follows: The petitioner claims that amounts of $1,216.72 and $132,353.19 spent for street paving are deductible in the respective years in question under section 234(a)(1) of the Revenue Act of 1918 as "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." To support this contention evidence was introduced tending to show that the petitioner believed it necessary in order to attract labor at a time when laborers were difficult to procure, to pave the streets of its mill village. It was testified that this labor necessity was the direct occasion for the paving expenditure and that under ordinary circumstances such an expenditure would not have been made. It was testified further that*3011 although the streets were owned by the corporation and had not been formally dedicated to the public, they had in fact been thrown open to the public and were in public use. From this it is argued that the expenditures were directly attributable to the business of the years in question, were therefore properly to be charged off entirely in those years, and were not capital expenditures. It is also argued that because the paving was upon streets devoted to the public its cost may be regarded as a donation to the public. We are, however, of the opinion that these expenditures were not within the statutory deduction. From the fact that labor difficulties were the direct occasion for these improvements by the petitioner, it does not follow that the benefits thereof to the petitioner were substantially limited to the year or that the profits of the year should alone be burdened with their cost. This is true even if it be assumed that the improvements were public and not solely for the private benefit of the plant. Even as to municipal improvements covered by special assessments, congress has clearly provided in section 234(a)(3) that such assessments are not to be deducted. *3012 See . And in section 235 and section 215(b) it is provided that no deduction may be allowed for amounts paid for permanent improvements. So far as the evidence shows, we may infer that irrespective of the particular occasion which necessitated the improvement, its result was to benefit the petitioner and its property for a period substantially longer than the year when the work was done. see . There is nothing to justify writing this expenditure off in its entirely in this single year when its effect is materially to enhance the value and utility of the entire plant. It is fanciful, in view of the evidence, to call the expenditure a "donation," or to allow its deduction as if it were a contribution to the community in order to increase current profits. In , it was held that sums expended to assist in securing better roads for the vicinity of the hotel were for a purpose entirely too remote and unrelated to the direct business needs of the petitioner to permit their deduction from income. *3013 *1027 We do not regard the cases of , and , as in point, as in those cases contributions were made for an immediate and direct benefit for the year in question, while here the intention and benefit obtained was permanent. The Commissioner's action is approved. Reviewed by the Board. Judgment for the respondent. PHILLIPS PHILLIPS, dissenting: Accepting as correct the findings of fact made by the Division of the Board which heard this proceeding that "the construction of the highway as finally located added no value to taxpayer's property," it is my opinion that the deduction claimed must be allowed, not as an expense of the business but as a loss. The payment in question was not made to acquire additional property or for an improvement to the property. It was made to protect the property interest which petitioner already possessed. In this respect it differs from all of the cases cited. It is may opinion that where expenditures are made to prevent damage to property used in a business, which expenditure merely preserves the present status of such property, *3014 adding nothing of capital value, a loss has been sustained which is deductible. For that reason, I can not agree that the decision reached is proper and must dissent.