*256 Decisions will be entered under Rule 50.
1. Capital Expenditure. -- The cost of replacing a gravel driveway to the taxpayers' plant with a cement driveway constituted a capital expenditure and was not a repair deductible as an expense.
2. Demolition With Intent to Replace -- Capital Expenditure. -- The remaining basis of a building which was demolished to make way for new construction is not a deductible loss but should be included in the cost of the new asset.
3. Deduction -- Business Expense. -- A machine-shop operator on a cash basis has not proven his right to deduct as an expense of his business the cost of castings in the year when purchased and must wait until the year of sale of these castings before he can recover their cost.
4. Net Operating Loss Carryover Deduction -- Evidence. -- A taxpayer must show more evidence to support his claim of a net operating loss carryover than just the returns for the years involved when some of the returns have been shown to be incorrect.
5. Fraud Additions -- Sec. 293 (b). -- A part of the deficiency for each of the years 1948 and 1949 was due to fraud with intent to evade taxes.
6. Failure to File -- Sec. 291 (a), Sec. 294 (d) *257 (1) (A). -- The failure to file income tax returns for 1948, 1949, and 1950 and declarations of estimated income tax for 1949 and 1950 was due to willful neglect and not to reasonable cause
*1101 The Commissioner determined deficiencies and additions to the tax against A. Raymond and Mary Lou Jones as follows:
| Deficiency | Additions to the tax under sec. | ||||
| Year | in tax | 291 (a) | 293 (b) | 294 (d) (1) (A) | 294 (d) (2) |
| 1948 | $ 53,553.74 | $ 13,388.44 | $ 26,776.87 | $ 3,213.22 | |
| 1949 | 87,558.18 | 21,889.55 | 43,779.09 | $ 8,755.82 | 5,253.49 |
| 1950 | 19,373.34 | 4,843.34 | 9,686.67 | 1,937.33 | 1,162.40 |
*258 The issues for decision herein are whether:
1. The cost of replacing a gravel driveway with a cement driveway constitutes a capital expenditure or is a deductible expense.
2. The adjusted cost of a building demolished to make way for new construction is a deductible loss or should be included in the cost of the new asset.
3. The cost of castings bought for a customer but not processed during the year is deductible in the year purchased or in a later year by a cash basis taxpayer.
4. The taxpayer is entitled to a deduction for the taxable year 1948 because of a net operating loss carried forward from the taxable year 1947.
5. Any part of the deficiency for each year was due to fraud with intent to evade taxes.
6. The failure to file income tax returns for each of the taxable years and declarations of estimated income tax for 1949 and 1950 was due to reasonable cause and not to willful neglect.
FINDINGS OF FACT.
The petitioners, husband and wife, resided in Dallas, Texas, during the taxable years. They did not file any income tax returns for the years 1948, 1949, and 1950 or declarations of estimated tax for 1949 and 1950. They had filed income tax returns for every year from 1938*259 through 1947.
The Commissioner determined deficiencies in income tax for each of the years 1945 and 1946. The taxpayers settled their 1945 taxes by an agreement with the Commissioner that any losses from the years 1943, 1944, 1946, and 1947 would offset 1945 income and would not be carried back or forward and again claimed as net operating loss deductions. A part of the deficiency for 1946 was collected by the Commissioner by means of a levy on a bank account of the taxpayers.
Raymond had been engaged in business for himself since 1938. He was in the core-drilling and grouting business and also operated a machine shop during the taxable years. His books and records were kept on a cash basis.
*1102 Raymond's plant was located in an old river bottom. The approach leading to his plant prior to 1949 was a gravel driveway. Minor floods frequently washed out the gravel and made the roadway unusable. Raymond paid $ 3,000 to a cement contractor in 1948 for some cement work which the contractor was to do for him. The contractor, for that payment, replaced the gravel driveway with a cement driveway and did other cement construction work in 1948. Raymond deducted $ 3,000 as a repair*260 expense of 1948. The Commissioner has disallowed that claimed deduction.
Raymond demolished a small warehouse in 1949 to make way for new construction at his plant. He deducted $ 1,735.99, the adjusted cost of the warehouse as a 1949 loss due to abandonment. The Commissioner disallowed that claimed deduction.
Raymond's shop began in 1947 to do machine work on injection valves for the Kinney Machine and Manufacturing Company. Kinney furnished the rough castings and other raw materials. The castings were merely shaped and assembled as finished valves in the machine shop. The Korean war made it difficult for Kinney to procure the necessary castings in 1950. Raymond, as a machine-shop operator, was able to obtain them and began to purchase them to assist his customer. His practice then was to bill Kinney for the cost of the castings, plus the machine and labor time involved, and to report his income therefrom as the bills were paid. Raymond purchased castings in excess of the orders for valves which he had from Kinney in order to avoid any time lag once he received the orders. He had on hand at the end of 1950 unprocessed rough castings, for which he had paid $ 17,474.71. He*261 deducted the cost of those surplus castings as an expense of 1950 although he had done no work on them and had not received any orders for them from Kinney. The shop was intended originally for the sole purpose of servicing tools used in the drilling business. It never made a practice of selling any product and never has used an inventory.
The accounting firm of W. O. Ligon and Company of Fort Worth filled in the income tax forms for the taxpayers for all the years 1938 through 1950. The forms for 1948 and 1949 were filled in at Raymond's request and were delivered to him as in previous years. He did not request the firm to prepare his 1950 return, but a form for that year was filled in and delivered to Raymond when the closing entries in Raymond's books were made by the accounting firm, as was the usual procedure. The form as filled in for 1950 showed a loss. Raymond kept the forms for the taxable years in his possession until the agents investigating his income tax liability asked for them. Those returns had not been signed by either taxpayer.
*1103 Raymond entered a plea of nolo contendere to the indictment of having willfully failed to file income tax returns for 1948*262 and 1949.
The petitioners have not shown that their failure to file income tax returns for each of the taxable years and their failure to file declarations of estimated tax for 1949 and 1950 were "due to reasonable cause and not due to willful neglect."
A part of the deficiency for each of the years 1948 and 1949 was due to fraud with intent to evade tax. The Commissioner reduced deductions for depreciation and disallowed the cost of the surplus castings as a business expense for 1950 and thereby determined a deficiency for that year. No part of the deficiency for 1950 was due to fraud with intent to evade tax.
OPINION.
The construction of the concrete driveway was not a "repair" of the old unsatisfactory driveway but was a completely new installation, a better driveway, having a greater value and having a different useful life. The cost thereof was a capital expenditure and not a deductible expense. The evidence fails to show what other construction work, if any, was done by the contractor in 1948 for the $ 3,000 payment; therefore the Commissioner's failure to allow the entire amount as a deduction is sustained.
Raymond decided in 1949 to demolish a small warehouse in order *263 to make way for the construction of a new building or buildings. He had used the warehouse for some time prior thereto for the storage of tools and parts. The adjusted basis of the warehouse is not deductible from income of 1949 under such circumstances but must be added as a part of the cost of the new asset constructed in its place. , affd. ; .
The petitioners contend that they are entitled to deduct for 1950 on a cash basis $ 17,474.71, the cost in that year of the surplus castings on hand at the end of the year on which no work had been done by the machine shop. Raymond apparently had never purchased the castings prior to 1950. He purchased them merely to aid his customer, perhaps as an agent, and was to be repaid the cost by the customer when he delivered a finished valve. He included the cost of each casting to him in billing Kinney for the work done on similar castings during 1950 and was reimbursed by Kinney. That method was a satisfactory one for income tax purposes, and if carried out in later*264 years would return to Raymond the full cost of all castings purchased by him, including those on hand at the end of 1950. He cannot deduct, under that method, the cost of the surplus castings on hand at the end of the year. This relatively large cost may be a capital expenditure to *1104 be subtracted from the amount realized in the later sale of the item. The purchase of those castings has not been shown to be an ordinary and necessary expense of his business, at least under his method of accounting, and the recovery of his cost must wait until he sells those items to his customer in later years, or otherwise disposes of them.
The taxpayers claim that they are entitled to a net operating loss deduction for 1948 based on a net operating loss carryover from 1947. See secs. 23 (s) and 122 (1939 Code). The Commissioner, in determining the deficiency for 1948, did not allow any such deduction, and the taxpayers have the burden to establish their right to it, including the amount. , also ; . The only evidence offered*265 herein to show the amount of the alleged deduction and the net operating loss on which it was based consists of the returns of the taxpayers for the years 1943 through 1947. The Commissioner did not accept the figures shown on the returns for 1945 and 1946 but determined deficiencies for those years. Obviously the returns are inadequate to sustain the petitioners' burden of proof in this case. Furthermore, the petitioners introduced into evidence a memorandum of an agreement whereby their tax liability for 1945 was settled. It was agreed, as a part of that settlement, that whatever net operating losses there might have been for the years 1943, 1944, and 1947 would be consumed in offsetting 1945 income. The evidence also shows that the Commissioner levied on a bank account in order to collect a part of the deficiency which he determined for 1946. Thus there could be no carryover of any 1947 net loss to 1948. The petitioners have failed to prove that they are entitled to a net operating loss deduction for 1948.
The Commissioner has the burden of proving by clear and convincing evidence that a part of the deficiency for each year*266 was due to fraud with intent to evade tax. The taxpayers were fully aware of their legal duty to file income tax returns for the years 1948, 1949, and 1950. The independent accounting firm which was employed by Raymond in connection with his business actually filled in an income tax form on behalf of the petitioners for each of those years and delivered those prepared documents to Raymond after the close of each of the taxable years in time to permit the taxpayers to sign and file those documents as their returns for the taxable years. The taxpayers deliberately refrained from executing and filing those forms as their returns. The documents prepared for the years 1948 and 1949, which were introduced into evidence, show substantial amounts of income for each of those years. The one prepared for 1950 showed a loss and no tax due. The evidence shows that the reason for the failure to file the documents was that Raymond did not want to use *1105 his money or have it taken to pay the taxes which the returns would show to be due, because he chose to use his money instead for other purposes, including the expansion of his business in some or all of the taxable years. Raymond *267 borrowed $ 45,000 from a bank in April 1949 and stated in the application that $ 27,000 thereof was needed to pay his 1948 income taxes. The taxes shown on the prepared form amounted to approximately that amount but were never paid. He made payments of $ 32,086 in 1948 and 1949 on a home which he was purchasing.
It is thus clear that the failure to file the returns for 1948 and 1949 was due to a fraudulent purpose. The information shown on the prepared forms was necessary or at least would have been helpful to the Government in determining the tax. That information was deliberately withheld to avoid the payment of tax, and known provisions of the law were unjustifiably disregarded with a fraudulent intent. The record as a whole sustains the Commissioner's burden of proving that a part of the deficiency for each of the years 1948 and 1949 was due to fraud with intent to evade tax.
The situation with regard to 1950 is a little different. The form prepared by the accountant for that year and delivered to Raymond showed a small loss and no tax due, so that if Raymond looked at it he would have known he could have signed and filed that document as the 1950 return without any apparent*268 tax liability. The figures which the Commissioner used in determining the deficiency for 1950 parallel those of the accountant as shown on the form which he prepared for 1950, with only two important exceptions. One was that the accountant proposed to deduct the $ 17,474.71 paid for surplus rough castings as an expense of the business, whereas the Commissioner did not regard it as a deductible item. The other was that the accountant's detailed figures for depreciation arrived at a proposed deduction of $ 59,079.54, whereas the Commissioner computed a deduction for depreciation of only $ 20,200.16. If the prepared document had been actually filed, those adjustments would not be clear and convincing proof of fraud. The Commissioner has failed to show that the petitioners were not aware of the fact that the document prepared by their accountant for their signature as their 1950 return showed no tax due. The record as a whole fails to show convincingly and clearly that a part of the deficiency for 1950 was due to fraud with intent to evade tax.
The Court and counsel for the Commissioner were clearly of the opinion at the conclusion of the trial that the petitioners were not contesting*269 the additions to the tax under sections 291 (a), 294 (d) (1) (A), and 294 (d) (2). However, the taxpayers in their briefs have argued that the imposition of these additions was improper, and in *1106 view of all of the circumstances the Court has given consideration to and has decided those issues. The taxpayers did not file any income tax returns for 1948, 1949, and 1950 or declarations of estimated tax for 1949 and 1950. They made no current payments during those years. It has already been pointed out that the failure to file required returns for 1948, 1949, and 1950 was deliberate. The record as a whole fails to show that there was reasonable cause for the failure to file the declarations of estimated tax. Even a lack of funds does not constitute reasonable cause. , affd. . Raymond claimed that he intended to file the returns and pay the tax as soon as the Government paid him for work which he had done for it. That would not be reasonable cause, and furthermore, he did not file the returns and pay the tax when the Government did pay him. He entered a plea of nolo contendere*270 to a criminal indictment for willfully failing to file returns. The record shows affirmatively that his failure to file the returns in question, which subjected him to the additions to the tax under sections 291 (a), 294 (d) (1) (A), and 294 (d) (2), was due to willful neglect, or worse, and was not due to reasonable cause.
Decisions will be entered under Rule 50.