*64 Decision will be entered under Rule 50.
1. Petitioner and his brother owned an apartment building in Berlin, Germany, in which they had inherited their interests in 1916 and 1926. In 1937, they sold the building under duress of Nazi discriminatory measures. In 1952, they recovered the building under procedures established by the Allied Powers for restitution of identifiable property to victims of Nazi oppression. Held, the basis of the property for computing depreciation is not the fair market value of the building upon recovery within the provisions of sections 1336, I.R.C. 1954, and 127, I.R.C. 1939, but is the adjusted fair market value of the building upon inheritance, which basis is determined.
2. The building had suffered war damages and deterioration while petitioner and his brother were out of possession. It was partially destroyed, partially untenantable, generally dilapidated, and the subject of citations for violation of the local building code, when petitioner and his brother recovered it. In 1954, 1955, and 1956 numerous extensive repairs were made on the building to make it more tenantable. Also, some replacements were made which amounted to capital improvements. *65 Held, that the cost of repairs is deductible in the respective taxable years when made. Held, further, that those expenditures made in each of the taxable years for replacements, alterations, or additions which were capital in nature are not deductible. The amounts of the two classifications named above for each of the taxable years are determined in our Findings of Fact.
3. In 1955, petitioner was suffering from a heart condition. He was unable to travel unattended. He, accompanied by his wife, made a trip to Berlin. Enroute he became seriously ill, was forced to rest at various towns between Genoa, Italy, and Berlin, and entered a sanitorium at Bad Nauheim, Germany, for heart treatment, while his wife underwent an operation for ulcer. On the trip he spent, for all of these things, $ 4,817.36 for himself and his wife. Held, petitioner is entitled to deduct $ 1,071.29 of the amount expended as the cost of ordinary and necessary travel expenses. Held, further, petitioner may not deduct the remainder as medical expenses. Petitioners took no deduction for medical expenses on their return. In their petition they raised no issue as to the disallowance of medical*66 expenses. They cannot now raise the issue of medical expenses for the first time, in their brief.
*1122 Respondent has determined deficiencies in petitioners' income tax for the years 1954, 1955, and 1956, as follows:
| Year | Deficiency |
| 1954 | $ 662.19 |
| 1955 | 643.51 |
| 1956 | 269.46 |
*1123 Petitioners contend that there are no deficiencies for any year but that, on the contrary, there are overpayments for the years 1954 and 1955 of the respective amounts of $ 318.30 and $ 918.23; they do not contend that there is any overpayment for 1956.
The issues presented are: (1) What is the proper basis for computing depreciation of a building located in Berlin, Germany, in which petitioner husband owns a one-half interest *68 and from which he received certain rentals in each of the taxable years. (2) Whether certain disbursements made during the years in issue constitute capital expenditures for improvements of the building, or deductible repair and maintenance expenses. Petitioners, on their returns, treated these expenditures as deductible expenditures for repairs and maintenance; respondent in each of the taxable years has capitalized them in their entirety to be recovered by way of depreciation over the useful life of the building. (3) Whether petitioners are entitled to deduct the entire cost of a trip to Europe in which Berlin was the ultimate destination, or some lesser amount, as business expense in 1955.
Respondent, in his determination of the deficiency for the year 1955, has capitalized one-half of these expenditures of the trip to Europe to be recovered by way of depreciation on the building which petitioners owned in Berlin. Respondent now concedes that this method of treatment was in error and that petitioners are entitled to have allowed as a deduction for business expense, $ 927.03 of the $ 4,817.36 which petitioners claim as a deduction on account of this trip. Respondent insists *69 that the balance of this claimed deduction should be disallowed; that it was in no sense a business expense.
FINDINGS OF FACT.
Many of the facts in this proceeding have been stipulated and they are incorporated herein by this reference.
Petitioners William E. and Carol Reisner, husband and wife, residing at Seattle, Washington, filed joint Federal income tax returns for the years 1954, 1955, and 1956 with the district director of internal revenue, Tacoma, Washington. (For convenience, William E. Reisner is hereinafter referred to as petitioner.)
In 1903, petitioner's father purchased real property (hereinafter referred to as the Berlin property) located in what is now Berlin, West Germany. On the property was a building erected in 1898 containing retail business stalls, offices, and apartments.
Petitioner's father died in 1916 at which time petitioner and his brother, Herbert, each inherited one-quarter interest in the Berlin property. In 1926, petitioner's mother died and petitioner and his brother inherited the remaining one-half interest in the property, one-quarter each.
*1124 Petitioner and Herbert rented the storerooms and apartments in the building. Herbert managed *70 the property for petitioner. In 1931, the property was not sufficiently productive because the apartments were too large, and the brothers expended RM60,000, or $ 14,178, in partitioning the apartments. The building contains 14 retail business stalls and offices, and 31 apartments.
The German Government placed a "tax unity value" on the property of RM307,800, or $ 72,733.14, in 1931 and of RM176,700, or $ 67,113.42, in 1935.
Petitioner's original family name was Cohn-Reisner; he and his brother were considered by the German Government to be non-Aryan. In 1933, petitioner left Germany for residence in another foreign State. In 1937, the German Government issued an order restraining disposition of the Berlin property pending payment of an emigration tax levied against the Reisner brothers. Herbert was in the custody of the Gestapo (secret State police), but was released on condition that the Berlin property be sold. Petitioner returned to Germany to discuss the sale of the property.
On May 14, 1937, the Reisner brothers sold the Berlin property to Dr. Friedrich Kroll for a price of RM200,000, payable RM80,000 in cash, assumption of mortgages totaling RM119,000, and payment of RM1,000*71 interest on the mortgages.
The RM80,000 in cash was paid over to an attorney for equal division between the Reisner brothers. Petitioner never received his share in the amount of RM40,000; RM21,073.50 was taken to satisfy the emigration tax and the remainder was placed in a blocked bank account which was subsequently confiscated.
Petitioner came to the United States in March 1940.
After cessation of hostilities in Germany, Berlin was placed under the government of the Berlin Kommandatura, composed of representatives of the United States, France, England, and Russia. The Berlin Kommandatura promulgated Berlin Order BK/O(49) 180 effective July 26, 1949, entitled "Restitution of Identifiable Property to Victims of Nazi Oppression." See 14 F.R. (No. 169) pp. 5438-5445.
On August 1, 1949, the Berlin property was placed under the authority of the Allied Property Control Custodian and petitioner was so notified. Petitioner and his brother filed a claim against Kroll, asking for restitution of ownership of the Berlin property, reimbursement of benefits (profits) derived from the Berlin property since June 6, 1937, and an order granting deferral of settlement *72 payments on their personal liability to Kroll upon claims for reimbursement which he might make against them.
On November 21, 1952, the Restitution Chamber of the County *1125 Court (Landesgericht Berlin) decreed the restitution of the Berlin property to the Reisner brothers but withheld final decision on the matter pending review by the Court of Appeals because Kroll had objected to the decision of the County Court and, in the alternative, claimed he was entitled to a DM100,000 cautionary mortgage to secure his reimbursement claim. In a written decision entered during its April 22, 1953, session, the Court of Appeals decreed that the decision of the lower court be amended so that the Reisner brothers would be registered as owners in an "indivisible community of heirs" of the Berlin property; that upon transfer of the title to the Berlin property, Kroll be given a DM60,000 "cautionary mortgage" (by the Reisners) to guarantee his claims for reimbursement; and that Kroll's appeal be dismissed. Inasmuch as the amount of Kroll's claim for reimbursement was not fixed, the final resolution of the matter was left to the decision of the Restitution Chamber of the County Court of Berlin.
*73 The transfer of the Berlin property from Kroll to the Reisner brothers was made effective as of November 21, 1952.
The final decree of the County Court of Berlin in the matter of the restitution claim of petitioner and Milly Reisner, who had been substituted as party claimant after Herbert's death, was entered February 19, 1957. The decree provided, inter alia, that the Reisners should assume liability on a mortgage on the property at the time the property was placed in the control of the Allied Property Control Custodian in the amount of DM7,028.43, or $ 1,675.58, and the cautionary mortgage in favor of Kroll should be reduced to the amount of DM30,000, or $ 7,152.
Respondent in his statutory notice computed the cost to the Reisner brothers of restitution of the property at DM42,092, or $ 10,034.73. He used this figure as the basis for depreciation, increased by certain capital improvements in each of the taxable years.
For the purpose of computing the income derived from the Berlin property, one-half of which is attributable to petitioner, the adjusted basis of the building to petitioner and his co-owner, including costs of restitution, was $ 46,068.16, or DM193,619.46, as*74 of January 1, 1954.
The Berlin property suffered damages due to the war. It was struck by incendiary bombs, small arms fire, and other explosives which damaged or destroyed, inter alia, extensive segments of the exterior stucco finish and ornamentation, gutters, brick chimneys, parts of certain apartments, and portions of the slate roof. Heavy damage to the roof of the structure resulted when rainwater entered the building and certain apartments in succeeding years, causing ceiling timbers to rot and plaster and lath to become rotted and detached. The conditions rendered some apartments untenantable, and other parts of the building unusable.
*1126 As a consequence of the condition of the building, the manager (and Allied Property Custodian) received numerous orders from the Building Police Inspectors regarding defects in the building rendering it unusable by certain tenants and endangering public safety, which defects were ordered, pursuant to local building repair laws, to be repaired or removed within specified dates under penalty of a fine.
Between 1953 and 1956, considerable work was done on the building. Damaged window and door frames were repaired or replaced; damaged*75 ceilings and walls were patched, repaired, or replaced; electric wiring and fixtures were repaired or replaced; damaged plumbing and fixtures were repaired or replaced; heating stoves and ranges were repaired or replaced; the roof and supporting members were repaired or replaced; damaged brickwork was repaired, a damaged tower was removed, and the roof replaced; numerous other repairs or replacements were accomplished. Detailed lists of all of these for each of the taxable years are in evidence.
During the years 1954, 1955, and 1956, expenditures in dollars and deutschmarks were made for repairs and replacements as follows:
| DM21,628.05 | |
| 1954 | $ 5,156.13 |
| DM14,307.84 | |
| 1955 | $ 3,400.97 |
| DM4,450.08 | |
| 1956 | $ 1,058.67 |
Of these expenditures in 1954, $ 1,062.50 was capital expenditures and the balance represented ordinary repairs and maintenance. Of the expenditures in 1955, $ 1,032.25 represented capital expenditures and the balance was expended for ordinary repairs and maintenance. Of the expenditures for 1956, $ 385.50 represented capital expenditures and the remainder was expended for ordinary repairs and maintenance.
Petitioner received communications by letters and telegrams*76 from his lawyer and the manager of the Berlin property requesting that he come to Berlin regarding the matter of repairing the building. Petitioner had a heart attack in 1954 and consulted doctors regarding the question whether or not he should make the trip to Berlin. Early in 1955 arrangements for the trip were made by petitioner while in Florida on advice of his doctor.
Petitioner, accompanied by his wife Carol, left Ft. Myers, Florida, by automobile on March 31, 1955, bound for New York City where they boarded a ship bound for Genoa, Italy, on April 6, 1955. *1127 Petitioner became ill aboard ship and upon doctor's orders that he should not continue traveling he and Carol stayed at a town called Nervi, near Genoa, for 3 weeks, 2 or 3 days at Milan, Italy, a day each in Lausanne, Switzerland, Heidelberg and Frankfurt, Germany. They traveled the route from Genoa to Frankfurt by train, making the stops in between. Bad Nauheim, a spa for heart diseases, is near Frankfurt. Petitioner stayed at Bad Nauheim for 5 or 6 weeks, resting and taking treatments. Carol was with him at Bad Nauheim for 2 or 3 weeks, spending the balance of the time at the University Hospital in Frankfurt*77 where she had an ulcer operation.
From Bad Nauheim, they proceeded to Berlin, with 1 day stopover enroute, where they stayed 3 weeks accomplishing an investigation of the Berlin property, discussing the repairs of the building with the building department, and obtaining a loan for the necessary repairs and replacements on the building. A delay of a week in their departure from Berlin was caused because they could not get airplane reservations. They left Berlin by airplane to Hamburg, thence to Rotterdam by train, and to New York City via steamship, arriving in New York on July 12, 1955. At that point they separated; petitioner traveled from New York across the continent to Seattle by train while Carol returned by automobile with their son.
During the trip to Europe, including Berlin, in 1955, petitioner expended the amount of $ 4,817.36 for himself and Carol. On their income tax return for 1955, petitioners did not take any deduction for these expenditures. In their petition they allege that the Commissioner erred in not allowing them a deduction of the entire amount of $ 4,817.36 as ordinary and necessary business expenses. They did not claim any deduction for medical expenses*78 either in their return or in their petition.
Petitioner's health prior to and during the trip to Berlin was such that he could not travel alone. While in Berlin Carol performed some services in regard to supervising management of the property which petitioner's health prevented him from doing.
Petitioner incurred ordinary and necessary expenses by way of travel expenses, including lodging, in the amount of $ 1,071.29 on his trip to Berlin.
OPINION.
Petitioner claims that he is entitled to use, for the purpose of computing depreciation thereon, the fair market value of the building located in Berlin, Germany, at the time of its recovery under the procedures for restitution of identifiable property to the victims of Nazi oppression. His claim is predicated upon the contention that the property was a war loss within the provisions of *1128 section 1336 of the 1954 Code 1 and section 127(a)(2) of the 1939 Code. 2 We are satisfied that petitioner's property does not come within the provisions of section 127. Before property is subject to the treatment afforded under that section it must be established "[that] the property was in existence and owned by the taxpayer on the date*79 war was declared." Benjamin Abraham, 9 T.C. 222. Where property was confiscated or escheated prior to the date war was declared, no war loss is sustained, Rozenfeld v. Commissioner, 181 F. 2d 388; Ernest Adler, 8 T.C. 726; Mayer v. United States, 111 F. Supp. 251. The question is whether, after the sale of the property in 1937 under the duress of discriminatory measures of the German Government, petitioner retained a sufficient interest to constitute the property subject to section 127. As to the sufficiency of the interest, the court said in Mayer v. United States, supra at 254:
The test which must be adopted in determining "sufficient interest" is a practical one. This identical question as to the nature of the test under section 127 was before the court in Rozenfeld v. Commissioner, 2 Cir., 181 F. 2d 388, 390, where the court stated:
"We understand from this that the test is a practical one, and does not depend upon an absolute forfeiture of all legal right. * * * The relevant consideration, *80 as we understand the Supreme Court [referring to United States v. S. S. White Dental Co., 274 U.S. 398, 47 S. Ct. 598, 71 L. Ed. 1120], is not the legal consequences of the seizure, but how completely the owner is dispossessed: i.e., the remoteness of any recovery of the property or its proceeds."
*81 Petitioner who sold his property in 1937 did not have any reasonable possibility of recovering the property until the promulgation on July 29, 1949, of Order No. 49, by the Allied Berlin Kommandatura. While article 13 of the order provides that "an order for restitution shall have the effect that the title, of the claimant or his predecessor in title, to any property the subject of an unjust deprivation shall be deemed not to have been divested," mere legal title to property of which one is dispossessed is insufficient to invoke application of section 127. Rozenfeld v. Commissioner, supra.
That section 127 is inapplicable, however, does not forthwith mean that respondent's determination of petitioner's basis in the Berlin property must be sustained. Article 13 of Order No. 49 provides *1129 that the effect of judgment in favor of claimant for restitution is that the claimant shall be deemed not to have been divested of title to the property. Although respondent asserts that this provision is remedial only, article 26 (subrogating claimants to claims of the former holders of the property against third parties), article 28 (entitling the claimant*82 to net profits produced by the property between the original transfer and restitution), and article 35 (authorizing a successful claimant to terminate leases given by former holders) make it clear that a claimant was to be accorded the substantive rights of a holder of legal title for the period of unjust deprivation. The result of a successful action for restitution is reestablishment of a claimant's original interest in property, not acquisition of a new interest.
The general statutory rule is that the basis of property is its cost. Sec. 113(a), 1939 Code; sec. 1012, 1954 Code. An exception to the rule is that the basis of property acquired by inheritance is the fair market value of the property at acquisition. Sec. 113(a)(5), 1939 Code; sec. 1014, 1954 Code. When capital expenditures are made in regard to the property the basis shall be adjusted accordingly. Sec. 113(b)(1)(A), 1939 Code; sec. 1016(a)(1), 1954 Code. These are the statutory provisions applicable to the property acquired by petitioner and his brother upon the deaths of their father and mother, capitally improved by them in 1931, and title to which was reestablished in 1952. The problem arises here in determining*83 the fair market value of the property in 1916, when the father died, and in 1926, when the mother died. No appraisals or valuations of the property were made at those times because none were needed. The record reveals the date the building was constructed and the tax valuations of the property in 1931 and 1935. We know something of the state and earning power of the building in 1931. We know the sale price of the building in 1937 and the amount of the mortgages on the property then outstanding.
The question, then, is whether, knowing these things but not specifically the fair market value of the property in 1916 and 1926, we are to deny petitioner any basis in excess of the admitted costs of reestablishing title to the property because we cannot determine the basis with that comfortable degree of accuracy which is always desirable. We cannot, under proper circumstances, avoid determination of the proper basis for computing a deduction merely because the task is difficult or the result inexact. Cf. Benjamin Abraham, supra;Cohan v. Commissioner, 39 F. 2d 540. We are satisfied that the building had a fair market value*84 on the dates on which petitioner acquired his interests. We are further satisfied that petitioner and his brother expended a considerable amount in partitioning the apartments in the building in 1931. We know, and it is admitted, that petitioner and *1130 his brother incurred costs in recovering the property. We, therefore, have concluded, and have so found, that the adjusted basis of the building to petitioner and his co-owner, as of January 1, 1954, was $ 46,068.16, or DM193,619.46. That adjusted basis, further increased by capital expenditures made in 1954, 1955, and 1956, as determined in our Findings of Fact, should be used in computing depreciation under Rule 50.
The second issue is whether all, or any part, of the amounts claimed as repair expenses may be deducted in arriving at the income derived from the property, one-half of which is attributable to petitioner, or whether, as respondent has determined, such amounts represent capital expenditures the cost of which must be added to the adjusted basis of the building and recovered through depreciation.
During the time petitioner and his brother were out of possession of the building, it suffered war damages and deterioration*85 through wear and tear. For various reasons the damages and deterioration were not repaired and the elements wreaked further damage with the result that upon restitution the building was in a state of dilapidation, partially destroyed, partially untenantable, and the subject of numerous citations for violation of the local building code.
In support of his contention that all of the amounts expended in each of the taxable years in repairing and restoring the building should be allowed as deductions for repairs and maintenance, petitioner cites and relies upon Illinois Merchants Trust Co., Executor, 4 B.T.A. 103. Petitioner quotes the rule stated in that case, as follows:
In determining whether an expenditure is a capital one or is chargeable against operating income, it is necessary to bear in mind the purpose for which the expenditure was made. To repair is to restore to a sound state or to mend, while a replacement connotes a substitution. A repair is an expenditure for the purpose of keeping the property in an ordinarily efficient operating condition. It does not add to the value of the property, nor does it appreciably prolong its life. It merely*86 keeps the property in an operating condition over its probable useful life for the uses for which it was acquired. Expenditures for that purpose are distinguishable from those for replacements, alterations, improvements or additions which prolong the life of the property, increase its value, or make it adaptable to a different use. The one is a maintenance charge, while the others are additions to capital investment which should not be applied against current earnings. * * *
Our Court has often cited and followed the rule laid down in the Illinois Merchants Trust Co. case and we think we should do so in the instant case.
There is considerable evidence in the record relative to the expenditures made on the building in the taxable years we have before us, 1954, 1955, and 1956. In fact, exhibits are in evidence which give complete statements of the expenditures on the building for the respective years and a brief explanation of the items involved. These *1131 exhibits are entitled "Statement of Repairs." Also, petitioner gave considerable testimony concerning these expenditures and there are photographs attached to the stipulation of facts which illustrate to some extent*87 the condition of the building from time to time. We have carefully considered all of this evidence in the record and in our Findings of Fact we have made findings as to what amount represented capital improvements in each of the taxable years and what amount represented repairs. The amount for capital improvements should be added to the adjusted basis of the building and recovered by way of depreciation. Petitioner's portion of the amounts expended for repairs should be allowed as deductions in the respective taxable years under section 212, I.R.C. 1954.
The third issue is presented by petitioner's claimed deduction of all the costs of the trip to Berlin in 1955. Respondent does not now deny the deductibility of the expenses of petitioner's trip to Berlin but insists that the expenses of travel by his wife and their medical expenses on the trip are not deductible as business expenses. Although respondent in his brief conceded a lesser amount, we have found and have so set forth in our Findings of Fact that petitioner's allocable share of travel expenses, without reference to medical expense, is $ 1,071.29. As for the remainder of the expenses, they represent the cost of travel*88 by petitioner's wife and the costs of their medical care in Europe which the facts show were very considerable. Neither class of expenses is deductible under the circumstances of this case.
It is apparent from the record that the purpose of Carol's travel in Europe was to care for her ailing husband. Laudable as such a purpose is, it has long been settled that a taxpayer may not deduct the expenses of either a wife or a nurse who accompanies him on business travels. George W. Megeath et al., 5 B.T.A. 1274. Only in the event that the presence of the wife serves a bona fide business purpose may the cost of her travel be deducted. Cf. Alex Silverman, 28 T.C. 1061.
On brief, petitioners contend alternatively that the expenses in question which are not deductible as business expenses are deductible as medical expenses under section 213(a), 1954 Code. 3 Petitioners have never heretofore made a claim that any part of the trip expenses is deductible as medical expenses; they made no claim for a medical expense deduction on their income tax return. Their petition makes no assignment of error that respondent in his determination*89 of the deficiency for 1955 erred in not granting petitioners a deduction of part of the expenses of the European trip as medical expenses. The *1132 petition nowhere says anything about medical expenses. An issue of this kind cannot properly be raised for the first time in the brief. But inasmuch as a part of the $ 4,817.36 expenditures in question was clearly ordinary and necessary business expenses in relation to the Berlin property, we hold that respondent erred in disallowing the claimed travel expense deduction to the extent of $ 1,071.29, and that petitioners have not established any right to claimed deductions in excess of that amount.
Decision will be entered under Rule 50*90 .
Footnotes
1. SEC. 1336. BASIS OF RECOVERED PROPERTY.
(a) In General. -- The unadjusted basis of property recovered in respect of property considered as destroyed or seized under section 127(a) of the Internal Revenue Code of 1939↩ shall be determined under this section. Such basis shall be an amount equal to the fair market value of such property, determined as of the date of the recovery, * * *
2. SEC. 127. WAR LOSSES.
(a) * * *
* * * *
(2) Property in enemy countries. -- Property within any country at war with the United States, or within an area under the control of any such country on the date war with such country was declared by the United States, shall be deemed to have been destroyed or seized on the date war with such country was declared by the United States.↩
3. SEC. 213. MEDICAL, DENTAL, ETC., EXPENSES.
(a) Allowance of Deduction. -- There shall be allowed as a deduction the following amounts of the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent (as defined in section 152):↩