Comm'r of Internal Revenue

Tax Court of the United States.Jun 30, 1955
24 T.C. 563 (U.S.T.C. 1955)
24 T.C. 563T.C.

Docket No. 53891.



George Denegre, Esq., for the petitioners. F. S. Gettle, Esq., for the respondent.

George Denegre, Esq., for the petitioners. F. S. Gettle, Esq., for the respondent.

CAPITAL EXPENDITURE OR REPAIR EXPENSE— GENERAL PLAN OF REHABILITATION— VIEUX CARRE OF THE CITY OF NEW ORLEANS— SEC. 23(a)(1)(A).— The total cost of rehabilitating, restoring, and improving deteriorated and uninhabitable rental property in the Vieux Carre of the City of New Orleans was a capital expenditure and no part was deductible as repair expenses.

The Commissioner determined a deficiency in income tax for the year 1950 in the amount of $20,546.04. The only issue presented for decision is whether $31,512.36 paid in making rental property habitable represented capital expenditures or repairs deductible as expense under section 23(a)(1)(A) of the Internal Revenue Code of 1939.


The petitioners are husband and wife and residents of Louisiana. Their joint income tax return for 1950 was filed with the collector of internal revenue for the district of Louisiana. The property involved herein was owned by Joseph, and hereafter he will be referred to as the petitioner.

Joseph acquired title to the property at 621 St. Peter Street in New Orleans on December 16, 1949, through the liquidation of a corporation of which he was the sole stockholder. He had purchased one-half of the stock in 1948 for $14,793.53 and had received the other one-half by gift from his mother in December 1949. Joseph was allowed a long-term capital loss of $8,550.67 for 1949 upon his representation that the value of this property, the only asset received in the liquidation, was $10,000.

The property fronted 19.56 feet on St. Peter Street and 57 feet on Cabildo Alley from which it had a depth in the rear portion of 23.3 feet to form an L. A 3-story brick building built in 1840 was on the property. The Louisiana State Fire Marshal had determined that the building was unsafe. It had deteriorated to such an extent that it was not suitable for habitation. A firm of architects employed by Joseph had recommended demolition and reported in October 1948 upon the condition of the building as follows:

FOUNDATIONS: These appear to have settled approximately 4' at the north end of the building on the Cabildo Alley side, and 2' at the west on the St. Peter Street side of the building. This unequal settlement undoubtedly is causing secondary stresses throughout the structure and is not uncommon among the old buildings in the French Quarter, the foundations of which are usually soft brick, cypress or a combination of both and which in this climate have more than a tendency to erode and rot after years underground.

EXTERIOR WALLS: Brick made of river sand and Spanish moss in very poor condition, and mortar weathered deeply away except on street and alley facades, which have been pointed within the last twenty years. Due to the foundation settlement, the wall along Cabildo Alley has cracked and buckled in several places, as have the walls in the court yard. A former attempt to tie the east and west walls with steel straps has proved entirely inadequate, as the straps at the west court yard wall have been turned into the eroded bricks joints, and the strength of this wall is inadequate of any support. This is a condition common to many buildings in the French Quarter which have been allowed to lapse into disrepair, and constitutes a major hazard.

INTERIOR WALLS: Studs and wood lath have rotted in many places, pa particularly in the stair wall, due to roof leakage. The interior stud bearing walls have warped out of line causing inadequate bearing or frictional bearing for joists on the floors above.

FLOORS: Floors are sloped in direction of joist framing due to inadequate bearing mentioned above, plus settlement of outer walls. There is evidence of rotted joists on all floors and the presence of rats within. Finish floors have buckled, tongue and grooving has sheared off in the rooms in which this type of installation has been made, and the older floors are generally worn and unfit for further finish.

PLASTER: Cracked generally and fallen from ceiling in two or three instances. Large areas have been patched from time to time, none too carefully. None of the plaster throughout the building is worth further patching.

STAIRS: Worn, leaning, and generally unsafe. Anchoring of stringers to walls has worked loose with the years— handrail and spindles have worked loose and several of the latter are broken or missing. Treads are worn thin, are unsalvageable and cannot be refinished.

WINDOWS: Muntins almost completely rotted away, particularly on outside. Same have warped causing lights to crack in several instances. Frames and sash have warped. Blinds have dried to extent that last coat of paint is almost completely absorbed. No windows are worth salvage.

DOORS: All doors warped or cracked, rails and stiles have been planed out of shape for a number of refittings. Panel moldings missing in several instances. None are worth salvage.

ROOF: Original slate has been covered or replaced by three layers of poor quality built up roofing, presently in need of re-felting and slating if rafters and jack-rafters are sound— which is doubtful.

CHIMNEYS: Tops are weathered and bricks missing from cornices. Flues are unlined and unsafe for use. Both have settled with building.

PLUMBING: Exposed in stairwell, poorly installed and not a centralized installation. Connections rusted in many places, brazing corroded and very little of it worth salvage.

PLUMBING FIXTURES: Outmoded, worn, and all in need of replacement.

ELECTRICAL: Entirely a knob and tube installation, much of it exposed. Insulation generally worn. Not in accordance with existing codes.

BALCONY AND IRONWORK: Balcony anchoring has worked loose, causing dangerous movement. Single floor rotted and unsafe. Ironwork rusted and corroded beyond salvage, rendering rails a hazard.

The building had no remaining useful life as a rental property in 1949.

The property is in the oldest and one of the most interesting parts of the Vieux Carre, or French Quarter, in the City of New Orleans and is of great architectural and historic value, being located on the site of the French Colonial Prison near the St. Louis Cathedral and the Cabildo. The Vieux Carre Commission was created under the law for the preservation of buildings and other structures having historical or architectural value in the Vieux Carre. The Commission had authority to determine whether or not a particular building in the Vieux Carre might be erected, altered, painted, or demolished. The building at 621 St. Peter Street came under the jurisdiction of the Vieux Carre Commission. The petitioner was informed on March 15, 1950, that the Vieux Carre Commission would not approve the demolition of the building because of its historical and architectural value. The petitioner employed an architect and a contractor for the purpose of complying with the safety regulations and making the apartments in the building habitable and the building otherwise usable. The architect and the contractor agreed to do the work on a cost-plus basis because neither was willing to be employed on any other basis due to the difficulty of estimating the extent of the work which would b; required.

Deterioration found throughout the building during the course of the restoration required the expenditure of larger amounts than could have been anticipated at the outset. The total amount expended was $48,819.95. The petitioner concedes that $17,307.59 of that amount should be capitalized since the money was spent for permanent improvements and betterments to increase the value of the property. The principal items going to make up the $17,307.59 and the approximate cost of each were as follows:

+-----------------------------------------------------------------------------+ ¦Description ¦Approx. ¦ ¦ ¦amount ¦ +-----------------------------------------------------------------+-----------¦ ¦Replacing small roof in courtyard ¦$450 ¦ +-----------------------------------------------------------------+-----------¦ ¦Replacing worn out heaters ¦950 ¦ +-----------------------------------------------------------------+-----------¦ ¦Building closets and walls around each bathroom ¦3,800 ¦ +-----------------------------------------------------------------+-----------¦ ¦Plastering in connection with new work ¦500 ¦ +-----------------------------------------------------------------+-----------¦ ¦Painting in connection with new work ¦380 ¦ +-----------------------------------------------------------------+-----------¦ ¦New plumbing fixtures ¦$2,300 ¦ +-----------------------------------------------------------------+-----------¦ ¦New electrical fixtures ¦175 ¦ +-----------------------------------------------------------------+-----------¦ ¦Tile ¦1,250 ¦ +-----------------------------------------------------------------+-----------¦ ¦Air conditioning ¦3,800 ¦ +-----------------------------------------------------------------+-----------¦ ¦Contractor's overhead and profit ¦1,870 ¦ +-----------------------------------------------------------------+-----------¦ ¦Architect's fee ¦1,080 ¦ +-----------------------------------------------------------------+-----------¦ ¦Hardware, roofing, paint, insulation, lintels, replacing part of ¦610 ¦ ¦wall condemned by city ¦ ¦ +-----------------------------------------------------------------------------+

The remaining $31,512.36 claimed to be deductible as ordinary and necessary expenses was spent for the following purposes in the amounts shown:

+-----------------------------------------------------------------------------+ ¦Purpose ¦Amount ¦ +-------------------------------------------------------------------+---------¦ ¦Masonry --repointing all exterior brick work, repairing cracks on ¦ ¦ ¦deteriorated parapets and chimney which were in hazardous state and¦ ¦ ¦other masonry work to place the building in a habitable ¦$1,978.75¦ ¦state--primarily work in connection with repointing all of the ¦ ¦ ¦exterior walls ¦ ¦ +-------------------------------------------------------------------+---------¦ ¦Miscellaneous iron and steel work --repairing fire escape to meet ¦ ¦ ¦requirements of State Fire Marshall, repairing hazardous condition ¦413.89 ¦ ¦of balcony rail ¦ ¦ +-------------------------------------------------------------------+---------¦ ¦Roofing and sheet metal --repairing deteriorated roof on main ¦344.00 ¦ ¦building and flashing balcony in order to make building water tight¦ ¦ +-------------------------------------------------------------------+---------¦ ¦Carpentry --repairs to rafters and floor joists deteriorated or ¦ ¦ ¦out of line, leveling floors, replacing rotten pieces, replacing ¦9,150.17 ¦ ¦old floors after joists were repaired, repairing deteriorated ¦ ¦ ¦balconies, repairing partitions ¦ ¦ +-------------------------------------------------------------------+---------¦ ¦Plastering --removing all interior plaster (which had lost its ¦ ¦ ¦key), applying water proofing cement on the inside of all exterior ¦2,839.85 ¦ ¦walls and replastering interior, replacing fallen plaster on ground¦ ¦ ¦floor ¦ ¦ +-----------------------------------------------------------------------------+

The 1950 expenditures of $48,819.95 materially added to the value of the property and gave the building a new useful life for rental purposes. The purposes for which the $31,512.36 was spent contributed proportionately to the increased value of the property and to its new useful life.

The general arrangement of the building was not altered by the work performed. The main entrance was left in its original position and the building had the same number of apartments, rooms, and bathrooms as it had prior to the work. The only structural change or improvement to the general plan of the building was the replacement of the old walls around the bathrooms with closets. Some portions of pipe in the plumbing system and of cable in the electrical system were replaced. The old floor boards were put down again with only a few replacements after the floors had been leveled. The same rafters and joists were used again, and only certain shingles were replaced in repairing the roof.

The building was released from rent controls in August 1950 upon a statement from the petitioner that the reconstruction was tantamount to new construction ‘more like the reconstruction of a building gutted by fire than ordinary repairs to old apartments.’

The petitioners claimed a deduction of $30,094.21 in their 1950 Federal income tax return for repairs to the building at 621 St. Peter Street. The Commissioner, in determining the deficiency, disallowed the entire amount, but allowed an additional amount for depreciation on the ground that the items represented capital expenditures.

The stipulation of facts including the exhibits annexed thereto are incorporated herein by this reference.



The petitioner spent about $49,000 in 1950 on the property at 621 St. Peter Street which he had then recently acquired. He concedes that $17,307.59 of the total represented capital expenditures but contends that the balance of $31,512.36 is deductible under section 23(a)(1)(A) of the Internal Revenue Code as the cost of repairs. He argues that the refusal of the Vieux Carre Commission to grant him permission to demolish the building in accordance with the recommendation of his architects left him with no alternative but to proceed with a repair program, regardless of the cost, and the sum of $31,512.36 was spent for items of repair which served only to put the building in good condition without structural changes inside or out, lengthening its useful life, or increasing its value.

Section 23(a)(1)(A) allows ‘all the ordinary and necessary expenses paid * * * during the taxable year in carrying on any * * * business' to be deducted from income of that year. Regulations 111, section 29.23(a)-4 states that ‘The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as expense, * * * .’ The expenditures involved herein were not made for ‘incidental repairs' but were part of an overall plan for the general rehabilitation, restoration, and improvement of an old building which had lost its commercial usefulness due to extreme deterioration. The building had passed beyond ‘an ordinarily efficient operating condition,‘ and expenditures were to restore it to, rather than to ‘keep it in,‘ operating condition. The useful life of the building had ended and its value had almost disappeared when the process of restoration started. The expenditures materially added to its value and gave the building a new useful life as a rental property. The petitioner contends, as his witness testified, that the property was worth $30,000 after completion of the work. The purpose and effect of the expenditures amounting to $31,512.36 were not ordinary maintenance expenses and cannot be separated from the general plan and purpose. They probably contributed as much as, or more than, the conceded capital expenditures to the increased value and new useful life of the building. None of the expenditures in question represented ordinary and necessary expenses of petitioner's business of renting the property at 621 St. Peter Street, but all should be capitalized and recovered during the new useful life of the building through deductions for depreciation, which will offset the rental income made possible by the restoration. This case is not distinguishable in principle from I. M. Cowell, 18 B.T.A. 997; Home News Publishing Co., 18 B.T.A. 1008; California Casket Co., 19 T.C. 32. Cf. Ethyl M. Cox, 17 T.C. 1287; Illinois Merchants Trust Co., Executors, 4 B.T.A. 103.

A taxpayer, even another Vieux Carre property owner, who, unlike this petitioner, did not have a large amount of net income from other sources would not want to deduct the amount in question in one year but would see the wisdom of the rule herein applied, which spreads the cost of the restoration over the remaining useful life of the restored building as an offset against rental income from the property. The fact that the petitioner may have been compelled by local law to make an economically unsound investment in the restoration of this building affords no basis for deducting capital expenditures as repair expenses. Cases cited by the petitioner, in support of his argument ‘that amounts expended by way of an involuntary preservation of the property are deductible as ordinary and necessary expenses,‘ involved expenditures required to protect or restore the normal operating efficiency of property damaged or threatened by relatively sudden external factors, such as storms, falling water level, oil seepage, and underground cave-ins. This case, which involved no such situation, is distinguishable.

Decision will be entered for the respondent.