Fire Cos. Bldg. Corp. v. Commissioner , 18 B.T.A. 1258 ( 1930 )

FIRE COMPANIES BUILDING CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Fire Cos. Bldg. Corp. v. Commissioner

Docket Nos. 26205, 40435.

United States Board of Tax Appeals

18 B.T.A. 1258; 1930 BTA LEXIS 2495;

February 19, 1930, Promulgated

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">*2495 1. Contributions by a corporation to a hospital held not deductible as business expenses.

2. The cost of replacement of iron piping with brass piping held to be a capital expense.

James L. Fort, Esq., for the petitioner.

John D. Kiley, Esq., for the respondent.

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PHILLIPS

">*1258 These proceedings were consolidated for hearing and involved deficiencies of income tax for the years 1922, 1923, 1924, and 1925, in the respective amounts of $25, $1,138.88, $304.73, and $3.66. The errors asserted are (1) that respondent refused to allow deductions as expenses of the following amounts donated to Beekman Street Hospital: $200 paid in 1922, $200 paid in 1923, $100 paid in 1923, and $500 paid in 1925, and (2) that respondent refused to allow as deductions the sums of $19,000 and $2,886 expended in 1923 and 1924, respectively, in repairing its hot water system.

FINDINGS OF FACT.

Petitioner is a corporation organized under the laws of New York and its address is 80 Maiden Lane, New York, N.Y. Petitioner is and was during the years in question the owner of an office building at 80 Maiden Lane, New York City. This building has an approximate">*2496 value of $10,000,000, and was erected in 1911 or 1912. It is 26 stories high and each floor except the top has approximately 14,000 square feet of space. The top floor has about 8,000 square feet of space.

The stock of petitioner is owned one-half by the Continental Insurance Co. and one-half by the Fidelity Finance Fire Insurance Co. of New York. These corporations have in the building from 600 to 650 employees. There are no hospital facilities in the building. ">*1259 A doctor is there for about two hours each day to treat colds, examine prospective employees and do other things of like character. When there is need of hospitalization of employees they are sent to Beekman Street Hospital, which is located in the vicinity. Following the custom of the neighborhood, petitioner has for a number of years contributed $200 to the hospital. Without contributions the hospital could not carry on.

When the office building was constructed a hot water system was installed with iron piping. From time to time these pipes required repairs. At a time not shown the building manager, who was an engineer of experience, recommended that repairs be made by putting in sections of brass">*2497 pipe as needed. Brass pipes were installed in place of iron pipes and in doing this work petitioner expended the sum of $25,000, of which $19,000 was expended in 1923, and $6,000 in 1924. When completed in 1924 there was a continuous line of brass pipes to each office in the building and all the hot water pipes were of brass, except certain iron pipes, the length of which is not shown, extending from the boiler. The substitution of the brass piping has not lengthened the life of the building.

Petitioner deducted $19,000 from its gross income in 1923 and $6,000 in 1924 as amounts expended for repairs. Respondent determined that the cost of the discarded iron pipe was $15,000 and allocated this amount as deductions from income for 1923 and 1924 in proportion to the amounts paid in those years for replacements, with the result that the sum of $11,400 was allocated to 1923 and the sum of $3,600 allocated to 1924, and these amounts depreciated he allowed as losses, with the following results: He reduced the said sum of $11,400 by depreciation previously allowed to $10,089 and deducted this amount from the $19,000 paid in 1923, and in this way has disallowed the claimed deduction">*2498 to the extent of $8,911. For 1924 he deducted from the payment of $6,000 made in that year the said sum of $3,600 and added to this depreciation previously allowed in the amount of $486, denying the claimed deduction to the extent of $2,886.

OPINION.

PHILLIPS: During the years involved petitioner owned an office building in New York City which it leased to two corporations owning all its capital stock. It contributed to a hospital serving the section of the city in which this building was located and seeks to deduct such contributions in computing its taxable income. The revenue act allows deductions to be taken by individuals for contributions to charitable corporations but fails to include such items among those allowed as deductions to be taken in computing the taxable ">*1260 income of corporations. The only basis on which such deductions are allowable to corporations are as ordinary and necessary expenses of a business carried on by them. ; .

The business of petitioner is that of owning and operating an office building. ">*2499 How many employees it has does not appear. The six hundred or more mentioned in our findings include those of the two insurance companies which own all of petitioner's stock and occupy this building. There is nothing that would indicate that petitioners are under any legal or moral duty to supply hospital facilities for the employees of such other companies. We are of the opinion that the record fails to establish that the contributions in question constitute ordinary and necessary expenses of the business of petitioner.

When the petitioner's building was constructed iron pipes were installed to distribute hot water to the offices and toilets. During 1923 and 1924 petitioner expended $25,000 in replacing the iron pipe with brass pipe. While the testimony is rather unsatisfactory and to some extent conflicting, it would appear that trouble developed in the distributing system to such an extent that it was deemed advisable to remove the iron pipes and replace them with brass. The major portion of this work appears to have been done in 1923 and 1924, being completed in the latter year. At that time the old piping had been entirely removed and replaced with new, except for certain">*2500 sections near the boiler. The Commissioner determined that the cost of the discarded pipe was $15,000, and, after adjusting for depreciation allowed in prior years, permitted this cost to be deducted in 1923 and 1924. He determined that the amount of $25,000 expended in installing brass pipes should be capitalized and recovered for income-tax purposes by annual depreciation deductions to be taken over its probable useful life. The ptitioner claims that the replacement of the iron pipe by brass was a repair, the deduction of the cost of which may be taken currently.

It is not always easy to distinguish between repairs which keep property in operating condition and the cost of which is deductible annually, and replacements and betterments the cost of which should be charged against reserves for depreciation or added to the cost of the property. To some extent the question may depend upon the basis on which depreciation has been taken and allowed. If the rate anticipates extraordinary repairs or replacements, it is proper that their cost be charged against the depreciation reserve so set up, but if the rate fails to anticipate such expenditures, some adjustment may be necessary">*2501 either by allowing the expenditures as deductions ">*1261 when incurred or by adding their cost to the cost of the property for depreciation in after years.

In the instant case we have a situation where an unsatisfactory system of distributing hot water was replaced. The new system will be in use for many years. The Commissioner has allowed the petitioner to recover the cost of the old system and proposes to allow the cost of the new system to be recovered in the years of its use. We see no valid objection to such procedure. See ; ; .

Decision will be entered for the respondent.