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Law School Case Brief

Midland Empire Packing Co. v. Commissioner - 14 T.C. 635 (1950)


To repair is to restore to a sound state or to mend, while a replacement connotes a substitution. A repair is an expenditure for the purpose of keeping the property in an ordinarily efficient operating condition. It does not add to the value of the property, nor does it 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.


Petitioner Midland Empire Packing Co. (hereinafter, “Midland”) was a meat-packing corporation. The Yale Oil Corporation, on the other hand, was the owner of an oil-refining plant and storage area located some 300 yards from petitioner’s meat-packing plant. In 1943, petitioner found that oil was seeping into its water wells. Federal meat inspectors advised petitioner to oilproof the basement and discontinue the use of the water wells or shut down the plant. The original walls and floor of petitioner’s plant were of concrete construction. For the purpose of preventing oil from entering its basement, petitioner added concrete lining to the walls from the floor, and also added concrete to the floor of the basement. Petitioner had this work done in the fiscal year ended November 30, 1943, at a cost of $4,868.81. Petitioner paid for the work during that year. After construction was completed, petitioner filed suit against Yale Oil Corporation praying for recovery of damages for the nuisance created by the oil seepage. Petitioner subsequently settled its cause of action against Yale for $11,659.49 and gave Yale a complete release from all liability; the release was dated October 23, 1946. The recovery of the cost of the waterproofing only was reported in its excess profits and income tax returns for the year ended November 30, 1946. For the fiscal year 1943, Midland charged $4,868.81 to repair expense on its regular books and deducted that amount on its tax returns as an ordinary and necessary business expense. The Commissioner of Internal Revenue, in his notice of deficiency, determined that the cost of oilproofing was not deductible, either as an ordinary and necessary expense or as a loss in 1943.


Was an expenditure for a concrete lining in petitioner’s basement to oilproof it against an oil nuisance created by a neighboring refinery deductible as an ordinary and necessary expense under section 23 (a) of the Internal Revenue Code?




The United States Tax Court held that the expenditure for lining the basement walls and floor was essentially a repair and as such was deductible as an ordinary and necessary business expense under section 23 (a) of the Internal Revenue Code. According to the court, 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, provided the plant or property account was not increased by the amount of such expenditures. The court held that repairs in the nature of replacements, to the extent that they arrest deterioration and appreciably prolong the life of the property, should be charged against the depreciation reserve if such account was kept. In the case at bar, the court noted that petitioner made the repairs in order that it might continue to operate its plant. Furthermore, after the expenditures were made, the plant did not operate on a changed or larger scale, nor was it thereafter suitable for new or additional uses.

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