Crocker First Nat'l Bank v. Commissioner

CROCKER FIRST NATIONAL BANK OF SAN FRANCISCO, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Crocker First Nat'l Bank v. Commissioner

Docket No. 42081.

United States Board of Tax Appeals

22 B.T.A. 1159; 1931 BTA LEXIS 1997;

April 10, 1931, Promulgated

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An amount expended for a new brick foundation to a building, occasioned by an excavation on adjoining property, held not deductible as an ordinary and necessary business expense or as a loss.

Lem de Fremery, Esq., for the petitioner.

Eugene Meacham, Esq., for the respondent.

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MCMAHON

This is a proceeding for the redetermination of a deficiency in income tax for the year 1926 in the amount of $2,888.08. The only error alleged is that the respondent refused to allow as a deductible expense the sum of $24,933.51, representing a portion of the cost of strengthening the foundations of petitioner's walls, entirely occasioned by the excavation for building on the adjoining property. The facts were stipulated by the parties.

FINDINGS OF FACT.

Petitioner is a national banking association with its principal office in San Francisco, Calif.

In 1925 a merger of several banks was effected and the petitioner acquired certain banking premises situated on the northwest corner of Montgomery and Post Streets, San Francisco. A part of the premises consisted of an annex which was in part a two-story and basement structure that had been erected shortly before 1925, with a foundation said to be about twenty feet deep.

During the calendar year 1926 an old building adjoining the bank's two-story structure was razed and a new building of about twenty-five stories, known as the Hunter Dulin Building, was erected. The Hunter Dulin Building's foundation was about ten feet deeper than that of the petitioner's annex on the side adjoining the new building. The local building regulations required that adjoining foundations extend down to the same level. Accordingly, a new brick foundation was placed below the whole foundation, of varying depths and widths, in accordance with the adjoining new foundations.

In addition, the petitioner decided that since this work was necessary, it would be advisable to place larger steel columns in the wall adjoining the new building from the ground to the top of the second story, in the portion of the annex consisting of two stories, in order that in the event it was decided to extend the two stories to a greater number of stories, in the portion of the annex fronting on the street, the columns enclosed in the wall would be adequate as well as the deepened foundations.

The cost of the steel columns, including installation, was $6,000. The cost of the added foundation was $22,433.51, and the engineers' fees were $2,500, making a total cost of $30,933.51.

The petitioner concedes that the amount of $6,000, representing the estimated cost of the steel columns, is a capital expenditure and not a proper deduction from gross income.

Petitioner deducted the entire sum of $30,933.51 on its income tax return for the calendar year 1926. The respondent has disallowed this deduction in full.

OPINION.

MCMAHON: The petitioner contends that the expenditures in question in the amount of $24,933.51 did not prolong the life of the banking premises, nor add to their value and are, therefore, deductible as repairs. From the facts stipulated we can not conclude that such expenditures did not increase the useful life of the property. Apparently the erection of the new foundations in connection with that of the steel columns made it possible for the petitioner to build a number of additional stories in the event it decided to do so. However, even if we could assume that the expenditures for new foundations did not increase the useful life of the property, it would not necessarily follow that they are deductible as ordinary and necessary business expenses. In the case of , the taxpayer made expenditures to raise its floor level to a height required by the city on account of floods. The effect of raising the level was to reduce the cubic contents of the lower rooms of the building and it did not prolong the life of the building. In that case we said:

* * * It appears to be clearly established by the evidence that they did not prolong the life of the petitioner's building, and there is testimony to the effect that they did not increase its value, although it seems unreasonable that a building so located as to be free from the menace of storms and floods is not more valuable than the same building, or the same kind of building, not so favorably situated. However, conceding that they did not prolong the life of the building, and assuming that they did not increase its value, they nevertheless were for alterations which were, as we conceive them, permanent betterments and improvements that rendered the building better suited to the purpose for which it was used. * * *

See also ; affirmed in ; ; and .

The fact that these expenditures were made involuntarily as a result of a municipal building regulation does not entitle the petitioner to deduct them as a business expense. See , and

The petitioner also cites the case of . In that case the taxpayer in order to prevent damage to its orchard paid an amount to the highway commission of the State of Oregon to induce it to reroute a proposed road so as to prevent its being laid through the taxpayer's property. The court held that this expenditure, being made to prevent loss to the taxpayer's property, constituted a deductible loss. We do not believe that this case is governing in the present instance. In the Seufert case, the expenditure did not result, in any way, in a permanent betterment or improvement to the property, but was made entirely to prevent a loss to the property. There was no way in which it could be recovered by the taxpayer as a part of the capital costs of the property. In the present instance the cost of the added foundations as a capital expenditure will be recoverable by depreciation deductions.

We, therefore, hold that the cost of the deepened foundations is not deductible as an ordinary and necessary business expense or as a loss.

Judgment will be entered for the respondent.