United States v. Akin

• Decision Date: 19 October 1957
• Docket Number: No. 5500.,5500.
• Parties: UNITED STATES of America, Appellant, v. Victor H. and Elsie AKIN, Fred C. and Alice M. Kluver, E. F. and Gladys Munroe, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

248 F.2d 742 (1957)

UNITED STATES of America, Appellant, v. Victor H. and Elsie AKIN, Fred C. and Alice M. Kluver, E. F. and Gladys Munroe, Appellees.

No. 5500.

United States Court of Appeals Tenth Circuit.

October 19, 1957.

Carolyn R. Just, Attorney, Department of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Robert N. Anderson, Attorney, Department of Justice, Washington, D. C., and Donald E. Kelley, U. S. Atty., Denver, Colo., on the brief), for appellant.

Stanley L. Drexler and Ellis J. Sobol, Denver, Colo., for appellees.

Before BRATTON, Chief Judge, and HUXMAN and MURRAH, Circuit Judges.

BRATTON, Chief Judge.

The question presented for determination is whether portions of annual assessments paid by taxpayers who were farmers to two mutual ditch companies which supplied water for the irrigating of the farms of the taxpayers and were used by such companies to retire long term indebtedness and to purchase a right of way were deductible from gross income of the taxpayers as ordinary and necessary expenses incurred in carrying on their farming businesses.

The taxpayers were engaged in the business of farming in Colorado, and they obtained water for the irrigating of their farm lands from two mutual ditch companies. The ditch companies were corporations organized under the laws of Colorado, and they distributed water to farmers who used it for the growing of agricultural crops. In order for a water right owner to be entitled to receive water distributed by the companies, it was necessary that he have stock in the company with all assessments paid. If a stockholder defaulted in the payment of an assessment, interest was charged; and if he remained in default after notice and demand for payment, his stock could be sold at public auction. During the years 1949 and 1950, each company made an assessment pro rata upon all of its stock issued and outstanding. Each assessment of one company contained an item for the retirement pro tanto of a long term indebtedness, an item for the payment of interest on the outstanding indebtedness, and an item for the purchase of a right of way; and each assessment of the other company contained an item for the retirement in part of a long term indebtedness, and an item for the payment of interest on such indebtedness. The taxpayers paid the respective annual assessments levied upon them by one or both of the companies and deducted the amounts thereof from their gross income as ordinary and necessary business expenses incurred in the operation of their farming businesses. The Commissioner of Internal Revenue disallowed the portions of the deductions attributable to the items referred to. Resulting deficiencies in tax were paid; claims for refund were made and disallowed; this suit was filed to recover the amounts of the deficiencies; judgment was rendered for the taxpayers; and the appeal was seasonably taken from the judgment.

Deductions from gross income are not a matter of right. Neither do they turn upon equitable considerations. They are a matter of legislative grace. And a taxpayer asserting a deduction must bring himself squarely within the terms of a statute expressly authorizing it. New Colonial Ice Co. v. Helvering, 292 U.S. 435, 54 S.Ct. 788, 78 L.Ed. 1348; White v. United States, 305 U.S. 281, 59 S.Ct. 179, 83 L.Ed. 172; Deputy v. Du Pont, 308 U.S. 488, 60 S.Ct. 363, 84 L.Ed. 416; Hales-Mullaly, Inc., v. Commissioner, 10 Cir., 131 F.2d 509; F. A. Gillespie & Sons Co. v. Commissioner, 10 Cir., 154 F.2d 913, certiorari denied 329 U.S. 781, 67 S.Ct. 204, 91 L.Ed. 670; Chicago Mines Co. v. Commissioner, 10 Cir., 164 F.2d 785, certiorari denied London Extension Min. Co. v. C. I. R., 333 U.S. 881, 68 S.Ct. 913, 92 L.Ed. 1156.

Section 23(a) (1) (A) of the Internal Revenue Code of 1939, 26 U.S. C.A. § 23(a) (1) (A), authorizes a deduction from gross income of all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. But the statute is limited to ordinary and necessary expenses paid or incurred in the conduct of a trade or business and does not authorize a deduction for capital expenditures. Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212; Hales-Mullaly, Inc., v. Commissioner, supra. It is not always easy to find a verbal formula which readily supplies an unerring guide in drawing the boundary line between current expenses and capital outlays. But it may be said in general terms that an expenditure should be treated as one in the nature of a capital outlay if it brings about the...