Mt. Morris Drive-in Theatre Co. v. Commissioner - 25 T.C. 272 (1955)

Rule:

The decisive test of whether a transaction is an ordinary business expense or a capital expenditure is still the character of the transaction which gives rise to the payment. 

Facts:

Petitioner constructed an open-air theatre on sloping land formerly covered with vegetation without including in the construction any drainage system. In 1950 it spent $8,224 to construct a drainage system extending into and over adjacent land belonging to another in compromise of a pending lawsuit against it based upon allegations that petitioner's use of its own property had caused accelerated and concentrated drainage onto the adjacent land.

Issue:

Was the commissioner correct in determining that the amount of $ 8,224 spent by the taxpayer in 1950 to construct a drainage system was a non-depreciable capital expenditure?

Answer:

Yes.

Conclusion:

The court agreed with the commissioner that the cost to the taxpayer of acquiring and constructing a drainage system in connection with its drive-in theatre was a capital expenditure. The court found that there was no sudden catastrophic loss caused by a "physical fault" undetected by the taxpayer in spite of due precautions taken by it at the time of its original construction work; no unforeseeable external factor; and no change in the cultivation of farm property caused by improvements in technique and made many years after the property in question was put to productive use. Instead, the court found that it was obvious at the time when the drive-in theatre was constructed, that a drainage system was needed and that until this was accomplished, the taxpayer's capital investment was incomplete.