Memorandum Findings of Fact and Opinion
SCOTT, Judge: Respondent determined deficiencies*277 in petitioner's Federal income taxes for the calendar years 1962 and 1963 in the amounts of $73,023.47 and $50,342.21, respectively.
The only issue in this case is whether petitioner is entitled to deduct the portion of the depreciation on transportation equipment used both for maintaining existing and building new facilities attributable to construction of the capital improvements.
Findings of Fact
Some of the facts have been stipulated and are found accordingly.
Petitioner, a public utility engaged in the production, transmission, distribution and sale of electric energy, was incorporated under the laws of Maine on May 6, 1915. Its principal place of business at the time of filing its petition in this case was in Boise, Idaho. It filed its Federal income tax returns for the calendar years 1962 and 1963 with the district director of internal revenue at Boise, Idaho.
Petitioner kept its books and filed its Federal income tax returns on an accrual method of accounting.
Ever since it was organized, petitioner has engaged in some construction of additions to its property. During the latter part of World War II because of the unavailability of outside contractors, petitioner*278 constructed all the new additions to its transmission and distribution facilities. At all other times some of its capital improvements have been constructed by contractors and some by petitioner with its own employees. At the time of the trial of this case petitioner had 140 employees engaged in new construction work. In prior years petitioner had as many as 300 employees engaged in constructing capital improvements.
The approximate gross amounts of property constructed by petitioner and by others as added each year to petitioner's property-account for the years 1961 through 1963 are as follows:
| Year | Gross Additions | Amount Con- | Amount Con-- | Purchased |
| structed by | structed by | Equipment | ||
| Petitioner | Others Under | |||
| Contract | ||||
| 1961 | $65,407,029.28 | $14,609,896.38 | $41,262,380.48 | $9,534,752.42 |
| 1962 | 1 8,235,440.22 | 7,139,940.72 | 314,790.45 | 780,709.05 |
| 1963 | 5,988,139.56 | 5,642.342.79 | 115,792.63 | 230,004.14 |
These*279 additions were primarily transmission lines, transmission switching stations, distribution lines, distribution stations and connecting facilities such as roads and timber turnings. 384
During each of the years 1962 and 1963 petitioner owned automotive transportation equipment used in its business. Communication equipment, such as radios, was affixed to the transportation equipment and used in the operation of such transportation equipment. Petitioner used such transportation equipment in part for operation and maintenance and in part for the construction of additional facilities having a useful life of more than one year.
The types of automotive transportation equipment owned by petitioner during the years 1962 and 1963 included passenger cars, pickup trucks, light trucks, medium trucks, heavy trucks, power operated equipment and trailers. All of this equipment is used for operation, maintenance and construction. Petitioner on its books uses various methods of charging the operating expenses of this equipment to operation and maintenance and construction, none of which is questioned by respondent. To the extent used in construction, petitioner on its books charged depreciation*280 on its transportation equipment as well as all costs of operating and maintaining such transportation equipment, except pension contributions, social security taxes and motor vehicle taxes to the capital assets so constructed. Depreciation was charged either directly or through clearing accounts in accordance with accounting procedures prescribed by the Federal Power Commission which have been adopted by the Idaho Public Utilities Commission. The depreciation so capitalized on petitioner's books of account for the years 1962 and 1963 amounted to $150,047.42 and $130,523.99, respectively.
In computing its taxable income as reported on its Federal income tax returns for 1962 and 1963, petitioner capitalized as a part of the cost of construction of its capital improvements all costs of operating and maintaining its transportation equipment which it had charged on its books to construction.
On its Federal income tax returns for the years here in issue petitioner deducted all depreciation on all its transportation equipment including depreciation allocated on its books to use of the equipment in construction. Such equipment was depreciated over a composite life of 10 years. Petitioner*281 depreciated all of its automotive transportation equipment whether or not used in construction under the straight line and declining balance methods of depreciation.
Respondent in his notice of deficiency disallowed and capitalized the deduction for depreciation on taxpayer's transportation equipment to the extent that such equipment was used in the construction of capital assets and allowed a deduction for depreciation on the amounts so capitalized over the useful life of the property constructed. The result of this adjustment was the disallowance by respondent of depreciation claimed by petitioner in the years 1962 and 1963 in the respective amounts of $140,429.75 and $96,811.95.
Opinion
Petitioner takes the position that its transportation equipment is used in its trade or business and therefore depreciation on this equipment is deductible under
*282 Petitioner states that its construction of its own facilities is an appropriate activity in connection with its production and sale of electric energy and cites numerous cases for the proposition that the phrase "property used in the trade or business" means devoted to such trade or business, regardless of whether or not such property was used in activities directly productive of income. All of the cases which petitioner cites in support of this contention deal with temporarily idle assets. Typical of the holdings of the cases cited by petitioner is our statement in
Where the statute allows deductions for depreciation of property "used in the trade or business," it has been held that "used in the trade or business" means 385 "devoted to the trade or business," and includes all such property, whether actually in use during the taxable year or not. * * *
These cases are not helpful in resolving the issue in the instant case. All the transportation equipment for which petitioner claimed depreciation was used part of the time in its trade or business of production and sale of electric energy and the portion*283 of the depreciation allocated to this "business" on petitioner's books has not been disallowed by respondent. This same equipment was used part of the time to construct capital improvements and respondent contends that the amount of depreciation allocable to such use should be capitalized and in effect considered as a part of the cost of the facility constructed. Respondent contends that petitioner was not "in the trade or business" of constructing facilities and that even if this activity is considered a part of petitioner's trade or business the deduction of any capital expenditure in connection therewith is prohibited by the provisions of
Petitioner argues that there is ample authority in support of the proposition that a taxpayer's trade or business includes all activities which are appropriate to its principal business, citing cases in which various activities such as purchase of corn futures, sale of baseball player contracts, and trading in currency 4 were determined to be appropriate to the taxpayer's principal business and therefore give rise to ordinary income. These cases are likewise not helpful in resolving the issue in the instant case. Obviously the acquiring*284 of capital improvements whether by purchase or construction is appropriate if not vital to petitioner's continued operation of its business of producing and selling electric energy but this fact does not cause the cost of these capital improvements to be deductible in the year acquired. The real issue here is whether the portion of the depreciation deduction for transportation equipment allocable to the construction of capital improvements should be viewed as a part of the "cost" of such capital improvements.
Petitioner further argues that disallowing the portion of the claimed depreciation deduction allocable to transportation equipment used in constructing capital improvements ignores the basic reason for allowing depreciation, that is, to permit a taxpayer to recoup the cost of equipment free of tax over its useful life so that it will have funds to replace such equipment.
This argument begs the question. *285 The reason for allowing a depreciation deduction is because the statute allows this method of recovering the cost of a piece of equipment with a useful life of over one year instead of allowing the total cost of such equipment used in a trade or business to be deducted in the year of purchase as a business expense. A deduction as a business expense is allowed for the type of tools, parts and equipment used in a trade or business which do not have a useful life of over one year such as the repair parts for petitioner's transportation equipment. However, petitioner has capitalized such items allocable to the construction of capital improvements.
Finally, petitioner argues that
In
Petitioner relies heavily on
As we pointed out in
In our view the issue in the instant case is indistinguishable in substance from the issue involved in
There is no dispute between the parties as to the amount of depreciation allocable to construction of capital improvements. We hold that respondent properly disallowed as a deduction in the years here in issue this allocable portion of depreciation and that such amount should be capitalized as part of petitioner's basis in the permanent improvements in the construction of which the equipment was used.
Decision will be entered for respondent. 387
Footnotes
Notes
1. The stipulation shows this figure as $8,235,640.22. The record does not show whether the error is in the total or one of the other figures. For simplicity we have corrected the total from $8,235,640.22 to $8,235,440.22.↩
2. All references are to the Internal Revenue Code of 1954.
SEC. 167, I.R.C. 1954 . DEPRECIATION.(a) General Rule. - There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) -
(1) of property used in the trade or business, or
(2) of property held for the production of income. ↩
3.
SEC. 263(a) CAPITAL EXPENDITURES.(a) General Rule. - No deduction shall be allowed for -
(1) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. * * *↩
4.
Corn Products Refining Co. v. Commissioner ;350 U.S. 46 (1955)Hollywood Baseball Association, , aff'd,49 T.C. 338 (1968)352 F. 2d 350 26 T.C. 198 ↩ (1956)