dissenting: With deference, I dissent.
Section 212 of the 1954 Code provides that “In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred * * * for the management, conservation, or maintenance of property held for the production of income.” It is not disputed that the expenses incurred by petitioner would fall within section 212, but for the issue of whether they should be capitalized. The majority opinion holds that petitioner’s expenditures are capital either because they fall within the scope of section 263, or because they were part of the “acquisition cost” of 4-year-old whisky and therefore must be capitalized under section 1012.
Section 263 provides that certain expenditures are to be capitalized if they are “paid out * * * for permanent improvements or better-ments made to increase the value of any property.” The majority concedes that petitioner’s expenditures “in and of themselves did not add to the value of the whisky.” Yet, the majority concludes, the expenditures “provided the opportunity for a ‘permanent improvement’ in the whisky” through chemical change, and thus must be capitalized. Unfortunately, the majority, preoccupied with the “chemical change” reflected by improvements in the “quality, flavor, and color” of the whisky, has, I believe, lost sight of the fact that, while the aging process might well improve bulk whisky from a consumer’s standpoint (a taste test), the statute requires an examination of the facts from an investor's standpoint (an economic test), i.e., whether the improvements or betterments were made “to increase the value” of the property.
It is quite clear from the record that petitioner purchased the bulk whisky as a speculative investment; he was not concerned about the flavor, color, or classification of the whisky when bottled for retail sale. Rather, his sole concern was to make a profit through resale of the bulk whisky when the market was right, and the market was controlled by supply and demand. It is erroneous, I believe, to require petitioner to capitalize his investment under section 263 because of a chemical change having no necessary effect on the bulk whisky as an investment.
Nor do I find section 1012 applicable. That petitioner intended to hold his bulk whisky until it was 4-year-old whisky does not mean that he intended to purchase 4-year-old whisky. The clear purport of his testimony is that he intended to purchase an asset which he believed would be more valuable in the future. From the moment he acquired the whisky he was free to sell it. Quite clearly, market appreciation was the factor influencing Ms decision. I believe this case falls squarely within the ambit of Higgins v. United States, 75 F. Supp. 252 (Ct. Cl. 1948): “[T]hese insurance and storage charges are not a part of either the purchase or sale transactions * * *. They are expenses incurred between the time the purchase transaction was completed and the sales transaction was begun. Their proper classification is as ordinary and necessary expenses rather than as capital items.” Id. at 255.
In Herbert Shainberg, 33 T.C. 241 (1959), relied on by the majority, the taxpayer was a member of a partnership formed to construct and operate a shopping center. The partnership hired a contractor to perform the work on a cost-plus basis. The partnership incurred certain expenses for sales tax, accounting services, cleaning services, and insurance as part of the job costs pursuant to the express terms of the construction contract. We held that these costs, quite clearly part of the contract price for a completed shopping center, were to be capitalized, since they were obviously an integral part of the cost of acquiring the asset intended to be purchased. Unlike Higgins v. United States, supra, and the instant case, the expenses were concededly part of the contracted acquisition cost of a capital asset.
I recognize, of course, that there are certain expenditures which are nondeductible under sections 162 or 212 because capital, even though not specifically covered by section 263 or 1012. See Spangler v. Commissioner, 323 F. 2d 913, 919 fn. 13 (C.A. 2, 1963). Thus, where the improvement is of the type which will benefit the property for an extended period, the outlay is not an “expense” within either section 162 or 212, and it will be capitalized even if the fair market value of the asset is not increased thereby. See Mercantile National Bank at Dallas, 30 T.C. 84, 95 (1958), affirmed on other issues 276 F. 2d 58 (C.A. 5, 1960); Hotel Sulgrave, Inc., 21 T.C. 619 (1954). But petitioner’s expenditures here — 'for insurance, storage, and ad valorem taxes — are of the kind which occur annually, and their benefit to the property is clearly transient. I believe that petitioner is entitled to deduct these expenditures under section 212 as the ordinary and necessary expenses of maintaining or conserving his investment in bulk whisky.
DREnnen and Fat, JJ., agree with this dissenting opinion.