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Joseph Merrick Jones and Eugenie Penick Jones, Petitioners, v. Commissioner of Internal Revenue, RespondentJones v. CommissionerDocket No. 53891June 30, 1955, Filed
United States Tax Court *145
Decision will be entered 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.George Denegre, Esq ., for the petitioners.F. S. Gettle, Esq ., for the respondent.Murdock,Judge .MURDOCK*563 The Commissioner determined a deficiency in income tax for the year 1950 in the amount of $ 20,546.04. The only issue presented for *564 decision is whether $ 31,512.36 paid in making rental property habitable represented capital expenditures or repairs deductible as expense under
section*146 23 (a) (1) (A) of the Internal Revenue Code of 1939 .FINDINGS OF FACT.
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 *147 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*148 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, 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.
*565 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*149 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*150 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*151 15, 1950, that the Vieux Carre Commission would not approve the demolition of the building because of its historic and architectural value. The petitioner employed an architect and a contractor for the purpose *566 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 be 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 wall condemned by city 610 *152 The remaining $ 31,512.36 claimed to be deductible as ordinary and necessary expenses was spent for the following purposes in the amounts shown:
