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26 U.S.C.S. § 263 requires taxpayers to capitalize costs incurred for permanent improvements, betterments, or restorations to property. In general, these costs include expenditures that add to the value or substantially prolong the life of the property or adapt such property to a new or different use. Treas. Reg. § 1.263(a)-1(b). On the other, under 26 U.S.C.S. § 162 permits taxpayers to currently deduct the costs of ordinary and necessary expenses (including incidental repairs) that neither materially add to the value of property nor appreciably prolong its life but keep the property in an ordinarily efficient operating condition.
Respondent Commissioner of Internal Revenue determined deficiencies in petitioner Norwest Corporation and Subsidiaries’ 1987 and 1988 federal income taxes as well as additional interest under section 6621(c) for 1988. Pursuant to an amended answer filed, respondent increased the amount of the 1988 deficiency. Petitioner sought review and argued that it was entitled to deduct under 26 U.S.C.S. § 162 the costs of removing asbestos-containing materials from a building that it owned, that it realized a loss on a foreign debt-equity conversion, and that a portion of the purchase price paid by petitioner for another company should have been allocated to goodwill.
Did the respondent correctly determine that petitioner was deficient in its income taxes?
The court affirmed the determination by respondent that petitioner taxpayer was deficient in its income taxes. The court held that petitioner was not permitted to deduct the costs of asbestos removal from one of its buildings as an ordinary business expense. But the petitioner was allowed, by the court, a discounted loss on its foreign debt equity conversion. Likewise, petitioner was allowed a discount rate as to invested capital. The court explained that 26 U.S.C.S. § 263 required the capitalization of costs incurred for permanent improvements, betterments, or restorations to property. That expenses incurred as part of a plan of rehabilitation or improvement were to be capitalized even though the same expenses if incurred separately would have been deductible as ordinary and necessary. Thus, because the asbestos removal was part of a building improvement, such costs were to be capitalized under § 263 and were not deductible as ordinary business expenses under § 162.