MIDLAND realm PACKING COMPANY, A CORPORATION, PETITIONER, v. COMMISSIONER OF internal REVENUE, RESPONDENT.

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ARUNDELL

Petitioner, a meat-packing corporation, by lining the walls and floor the its basement v concrete, seek to protect it native the seepage of oil flood on the soil by a surrounding refinery. The oil nuisance threatened ongoing operation the the packing plant. The function of the expenditure for the concrete liner was no to prepare the tree for procedure on a readjusted or bigger scale, nor to make it perfect for brand-new or extr uses, yet only to permit petitioner to proceed the use of the plant, and particularly the basement, in common operation. Held, the expenditure because that lining the basement walls and floor was essentially a repair and also as together is deductible as an ordinary and necessary organization expense under section 23(a) that the internal Revenue Code. James R. Felt, Esq., because that the petitioner. Wilford H. Payne, Esq., because that the respondent.

This case involves deficiencies in asserted value excess earnings tax in the quantity of $321.34 and excess profits tax in the lot of $4,092.72 because that the taxable year finished November 30, 1943. The problem presented because that decision is whether or not the sum of $4,868.81 expended through the petitioner in oilproofing the basement of its meat-packing plant throughout the taxable year 1943 is deductible as an ordinary and necessary company expense under section 23(a) the the inner Revenue Code, or, in the alternative, together a lose sustained throughout the year and also not compensated for by insurance or otherwise under ar 23(f) of the inner Revenue Code.

The situation has to be submitted on a partial stipulation of facts, documentary evidence, and oral testimony.

FINDINGS that FACT.

The petitioner, herein sometimes referred to together Midland, is a Montana corporation and also the owner that a meat-packing tree which is located surrounding to the city that Billings, Yellowstone County, State of Montana. The returns because that the duration here affiliated were filed through the collector of interior revenue for the ar of Montana. Its books of account and its taxes returns were, during the taxable year and at all other times, preserved on the accrual communication of accounting. Petitioner"s returns were based upon a fiscal year ending November 30.

The basement rooms of petitioner"s plant were offered by that in its service for the curing the hams and also bacon and also for the storage of meat and also hides. These rooms have been provided for such purposes because the tree was built in around 1917. The original walls and also floors, which to be of concrete, were no sealed versus water. There had been seepage for many years and this condition came to be worse about 1943. At details seasons the the year, as soon as the water in the Yellowstone river was high, the secret water caused increased seepage in the plant. Together water did not interfere through petitioner"s use of the basement rooms. They to be satisfactory because that their function until 1943.

The Yale Oil Corporation, sometimes referred come herein together Yale, to be the owner of one oil-refining plant and storage area situated some 300 yards update from petitioner"s meat-packing plant. The oil plant was built some years after petitioner had remained in business in its existing location. Yale broadened its plant and also storage from year come year and oil escaping from the plant and storage framework was carried to the floor surround the the plant of petitioner. In 1943 petitioner uncovered that oil to be seeping right into its water wells and into water i beg your pardon came with the concrete wall surfaces of the basement of its packing plant. The water would certainly soon drainpipe out through the sump, leaving a thick scum that oil ~ above the basement floor. Such oil offered off a solid odor, i beg your pardon permeated the wait of the entire plant. The oil in the basement and fumes therefrom created a fire hazard. The commonwealth meat inspectors advised petitioner to oilproof the basement and discontinue the usage of the water wells or shut down the plant.

As shortly as petitioner found that oil had started to seep right into its water wells and into the basement that its plant, its policemans conferred v the policemans of the Yale Oil Corporation and also informed Yale the they intended to host it liable for all damages caused by the oil which had saturated the ground about its packing plant. They educated the public official of Yale the they thought this problem constituted a legitimate nuisance, which condition they supposed would proceed to exist because that future years, and that they to be discontinuing the usage of your water wells. The public official of Yale were also informed the the Federal assessors were inquiry petitioner to oilproof the basement.

A. F. Lamey, attorney at legislation in Billings, Montana, tackled nearly all of the negotiations because that the negotiation of the claims made through Midland against the Yale Oil coporation, group for loss resulting from the oil escaping native Yale"s refineries to the premises of the packing company. He stood for the Yale Corporation and also the Maryland accident Co., which brought liability insurance v respect to Yale. At an early stage in 1943 he checked out the packing tree to inspect the basement and also observed the situation as found above. That talked v Chris Shaffer, that the petitioner corporation, and informed him the Yale was no assuming any responsibility and that it was petitioner"s duty come take every little thing steps were important to minimization damages. Prior to that time, petitioner argued piece-meal settlements, i beg your pardon Yale decreased to consider due to the fact that they feeling it would certainly be to your disadvantage to assume obligation for any type of damages without a finish release. Lamey composed to the Maryland casualty Co., Yale"s insurer, in a letter date March 31, 1943, with recommendation to this situation, in part as follows:

Past experience suggests that small can it is in done with a conference with Mr. Shaffer, who is in charge of the plant. His requirements are constantly exorbitant and also he has actually never been willing to make any kind of proposition because that a complete and also final settlement. He appears to have actually the idea the the Yale need to make monthly payments on the water account, pay damages on hides annually as they space injured, etc. If us ever began making payment on that basis there would certainly be no end to our difficulties. We therefore said to the Yale that we perform nothing. We feel that us would have a better opportunity to dispose that this case if the Packing agency obtained the solutions of a lawyer who might advise castle with recommendation to their rights, and the limits of the Yale"s responsibilities.

On June 10, 1943, Lamey again composed to the Maryland accident Co. Through respect to the matter of Yale"s legal responsibility to Midland:

Since ours letter the the 5th, we have held 2 conferences through representatives that the Midland realm Packing Company. The claimant has employed M. J. Lamb of this city together attorney. At the conference, Mr. Frank Jacoby, a contractor, has likewise been present. It is our knowledge that he has actually some interest in the pack plant. However, we understand him an extremely well. The is a competent and honest contractor.

Frank Jacoby to be a building contractor, who additionally did fix and innovation work at miscellaneous times for petitioner corporation. He own one-third that the capital stock of the petitioner throughout the duration here involved and also later became vice president of the corporation. Jacoby talked with the officers of Yale about the nature the the oil-sealing occupational to be excellent on petitioner"s plant in order to insure the the job-related was excellent to the satisfaction the Yale, inasmuch together petitioner was in search of reimbursement for that amount native Yale. Midland chose to continue with the occupational in the basement and Yale agreed that it should be done and also that in any litigation or in any settlement the ensued it would certainly accept the testimony of Jacoby regarding the reasonableness the the price of the job-related done. They also agreed to recognize the bills because that such work as an aspect of damages if a settlement was later effected. The Yale officials refused to execute the repair work themselves.

The president of Midland continued to refuse to provide a finish release spanning future damage. The letter the June 10, 1943, recited some of the items claimed by petitioner corporation, including several recommendations to the repair in petitioner"s basement.

With respect come the hold-up in giving the petitioner a identify answer come the negotiation of the liability, the letter stated:

It is rather challenging for the policemans of the packing company to recognize why us cannot give an instant definite answer, in see of the truth that the offices of the Yale Petroleum firm are located in Billings. They have actually no understanding that over there is insurance allowance coverage. We point out this so that you will recognize the prominence of making part decision with recommendation to a basis of negotiation as shortly as possible.

Finally, about the legal basis of Yale"s liability to the petitioner for the damages brought about by the oil, Lamey composed to the insurance agency that it was his opinion the Midland would have little an obstacle in developing liability on the component of the Yale Oil Corporation. The also listed that the items of damage claimed by the packing firm could be taken into consideration as proof of damages. The letter then proclaimed that, if the amount essential to resolve the insurance claim might be big and the Yale Co. Would not have the ability to get a release for future damages, as soon as the basement repairs to be completed there need to be tiny future damage. He recommended that the case be resolved and concluded through a statement the it was to Yale"s advantage that Midland was proceeding v repairs to the basement.

The original walls and also floor that petitioner"s plant to be of concrete construction. Because that the purpose of staying clear of oil from entering the basement, petitioner included concrete lining to the walls from the floor come a elevation of about four feet, and also added concrete come the floor the the basement. Due to the fact that the walls and floor had actually been thickened, petitioner now had less an are in which come operate. Petitioner had this occupational done by live independence contractors, oversaw by Jacoby, in the budget year finished November 30, 1943, at a cost of $4,868.81. Petitioner paid for this work during that year.

The oilproofing occupational was reliable in sealing out the oil. While it has actually served the purposes for which it was intended down to the existing time, it did not rise the valuable life that the structure or make the building more valuable for any purpose than it had been prior to the oil had come into the basement. The main object that the oilproofing procedure was to stop the seepage the oil right into the basement so the the petitioner might use the basement as before in preparing and packing satisfy for advertising consumption.

After the oilproofing was completed and also prior to the close of the petitioner"s taxable year finished November 30, 1943, negotiation for negotiation were again conducted in between representatives that petitioner and also the Yale Oil Corporation, in ~ which time Yale offered to pay petitioner in cash the sum of around $7,500 in satisfaction that all cases asserted through Midland against Yale, detailed Midland would certainly execute a general release come Yale. Because Midland to be unwilling and refused to give such relax for the payment offered, no amount was in fact paid come petitioner through Yale in that year. Petitioner continued to maintain that it was entitled to a much bigger amount for the general damages done to the tree by this nuisance. Negotiations had reached this allude in the budget year ended November 30, 1943.

The petitioner thereafter filed suit versus Yale, on April 22, 1944, in a reason of action sounding in tort and on November 30, 1944, joined as a defendant in such activity Yale"s successor, the Carter Oil Co., i beg your pardon had got the properties of Yale Oil Corporation. This action was to recuperate damages for the nuisance developed by the oil seepage. In those proceedings the defendants demurred to the joinder of parties in the petitioner"s complaint. On appeal, the Montana can be fried Court sustained the demurrer.

Petitioner subsequently settled its reason of activity against Yale for $11,659.49 and gave Yale a finish release of every liability. This relax was dated October 23, 1946. The restore of the cost of the waterproofing just was report in its overabundance profits and also income taxation returns for the year ended November 30, 1946.

The petitioner is quiet making claim upon the Carter Oil Co. And is endeavoring to settle that case without suit.

Midland charted the $4,868.81 come repair cost on its continuous books and also deducted the amount on its taxation returns as an ordinary and also necessary company expense for the fiscal year 1943. The Commissioner, in his notice of deficiency, determined that the cost of oilproofing was not deductible, either together an ordinary and also necessary price or as a lose in 1943.

OPINION.

ARUNDELL, Judge:

The concern in this situation is whether an expenditure for a concrete lining in petitioner"s basement to oilproof it against an oil nuisance developed by a surrounding refinery is deductible together an ordinary and also necessary expense under ar 23(a) that the inner Revenue Code, ~ above the concept it to be an expenditure because that a repair, or, in the alternative, whether the expenditure may be treated together the measure of the lose sustained throughout the taxable year and also not compensated for by insurance allowance or otherwise in ~ the definition of ar 23(f) that the inner Revenue Code.

The respondent has contended, in part, that the expenditure is because that a capital improvement and must be recovered v depreciation charges and also is, therefore, not deductible together an ordinary and necessary company expense or as a loss.

It is nobody too simple to determine on which next of the line particular expenditures loss so that they may be accorded their appropriate treatment for taxation purposes. Treasury regulation 111, from which we quote in the margin, is advantageous in distinguishing between an expenditure to it is in classed together a repair and also one to it is in treated together a funding outlay.

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