United States v. Wehrli, 9723.

• Decision Date: 11 September 1968
• Docket Number: No. 9723.,9723.
• Citation: 400 F.2d 686
• Parties: UNITED STATES of America, Appellant, v. W. J. WEHRLI and Helen B. Wehrli, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

400 F.2d 686 (1968)

UNITED STATES of America, Appellant, v. W. J. WEHRLI and Helen B. Wehrli, Appellees.

No. 9723.

United States Court of Appeals Tenth Circuit.

September 11, 1968.

Benjamin M. Parker, Washington, D. C., (Mitchell Rogovin, Lee A. Jackson, and David O. Walter, Washington, D. C., with him on the brief), for appellant.

W. J. Wehrli, Casper, Wyo., (Houston G. Williams, Casper, Wyo., with him on the brief), for appellees.

Before MURRAH, Chief Judge, WILBUR K. MILLER,^* Senior Circuit Judge, and BREITENSTEIN, Circuit Judge.

MURRAH, Chief Judge.

In this suit for refund of federal income taxes, the trial judge submitted two alternate forms of verdict under which the jury was permitted to find that expenditures made by appellee Wehrli in the preparation of rental property for an incoming tenant were: (1) "for repairs * * * ordinary and necessary in the conduct of the taxpayers' business", deductible under Section 162¹ of the Internal Revenue Code of 1954, or (2) "capital expenditures * * * which should be depreciated as a capital investment" under Section 263.² The Government appeals from a judgment on the jury's verdict finding that the expenditures were ordinary and necessary business repairs. The argument seems to be that the Government was entitled to prevail on a directed verdict as a matter of applicable settled law, or, in any event, was entitled to a requested instruction embodying such settled law for determining the ultimate and submitted issue.

The established operative facts are that in 1957 Wehrli, the taxpayer, purchased an office building on two lots for $170,000³ from an oil company, which continued to occupy the premises for approximately seven months after the sale. The two story building was in the shape of an "L", and consisted of an old wing, built prior to 1920, and a new wing, built about 1940. Wehrli began efforts to find a new tenant soon after the purchase, and finally negotiated a five-year lease with Tenneco, Inc. As a condition for entering into the lease, Tenneco required Wehrli to do substantial work to adapt the building to its needs, and submitted a proposed floor plan for the rearrangement of the interior space. It is not clear whether the rearrangement was done in accordance with the submitted floor plan, but the entire work done included the following: air-conditioning the entire building; rearranging the interior space of the old wing by "tearing out" a hallway, the load-bearing wall, and two concrete vaults, and replacing the load-bearing wall with steel support columns; installing, as needed, new wall partitions, floor covering, electrical wiring, and plumbing fixtures; plastering and painting in both wings; moving the rest rooms "from where they were, forward in the building, somewhere to the rear of the building"; and installing new doors.

During 1959 Wehrli's expenditures for the work totaled approximately $97,000, of which $13,500 was reimbursed by Tenneco. In their joint tax return for that year Wehrli and his wife treated approximately $27,000 as capital expenditures for air-conditioning, steel, partitions, and exterior doors, and claimed the remaining $57,000 as deductible business expenses. The Commissioner asserted a tax deficiency in 1963, allowing only $1,654.84 as deductible expenses in 1959. The treatment of the remaining $55,000 is the subject matter of this suit.

The deductibility of repairs as ordinary and necessary business expenses is treated by a long-standing and unchanged regulation entitled "Repairs", which provides: "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 an expense * * *. Repairs in the nature of replacements, to the extent that they arrest deterioration and appreciably prolong the life of the property, shall * * * be capitalized * * *." Regulation 1.162-4.

As early as 1926, the repair criteria in the regulation were illuminated and contrasted with capital expenditures in Illinois Merchants Trust Co., 4 B.T.A. 103. There, the then Board of Tax Appeals characterized a "repair" as an expenditure to restore to a sound state or to mend — one which keeps the property in an ordinarily efficient operating condition and does not add to the value of the property nor appreciably prolong its life. "It merely keeps the property in an operating condition over its probable useful life for the uses for which it was acquired." Id. at 106. Expenditures for that purpose were distinguished from those for "replacements, alterations, improvements or additions which prolong the life of the property, increase its value, or make it adaptable to a different use. The one is a maintenance charge, while the others are additions to capital investment which should not be applied against current earnings." Id. The regulation, as thus approved, is now undoubtedly the prevailing guideline for the judicial function of determining whether, in a given case, an expenditure on property is deductible as a current repair expense or must be capitalized. See Denver & Rio Grande Western Railroad Co. v. Commissioner of Internal Revenue, 10 Cir., 279 F.2d 368; Jones v. Commissioner of Internal Revenue, 5th Cir., 242 F.2d 616; Page v. Kelm, D.C., 128 F.Supp. 14; Buckland v. United States, D.C., 66 F.Supp. 681; Oberman Manufacturing Co. v. Commissioner, 47 T.C. 471; Plainfield Union Water Co. v. Commissioner, 39 T.C. 333; Reisner v. Commissioner, 34 T.C. 1122; Bloomfield Steamship Co. v. Commissioner, 33 T.C. 75; Southern Ford Tractor Corp. v. Commissioner, 29 T.C. 833; Midland Empire Packing Co. v. Commissioner, 14 T.C. 635.

In our search for a more definite formula for the resolution of the line-drawing process, we evolved what may be called the "one-year" rule of thumb, under which an expenditure should be capitalized "if it brings about the acquisition of an asset having a period of useful life in excess of one year or if it secures a like advantage to the taxpayer which has a life of more than one year." Hotel Kingkade v. Commissioner of Internal Revenue, 10 Cir., 180 F.2d 310, 312. This concept has received rather wide acceptance,⁴ and we are urged to make arbitrary application of it here. We think, however, that it was intended to serve as a mere guidepost for the resolution of the ultimate issue, not as an absolute rule requiring the automatic capitalization of every expenditure providing the taxpayer with a benefit enduring for a period in excess of one year. Certainly the expense incurred in the replacement of a broken windowpane, a damaged lock, or a door, or even a periodic repainting of the entire structure, may well be treated as a deductible repair expenditure even though the benefits endure quite beyond the current year.

In the continuing quest for formularization, the courts have super-imposed upon the criteria in the repair regulation an overriding precept that an expenditure made for an item which is part of a ...