*58 Decision will be entered under Rule 50.
In 1951, petitioner purchased eight war-built vessels from the Maritime Administration. Prior to taking title to the vessels, petitioner expended $ 550,846.78 in repairs and defense removals to place the vessels in seaworthy and cargoworthy condition satisfactory to the United States Coast Guard, the American Bureau of Shipping, and other regulatory agencies. Petitioner was given a credit or allowance by the Maritime Administration which reduced by $ 540,344.84 the amount petitioner was required to pay to the Maritime Administration to receive title to the vessels. Held, petitioner may not deduct the cost of repairs incidental to this capital expenditure as ordinary and necessary business expense. The respondent's determination is sustained. Held, further, petitioner did not prove that the useful life of the repairs was less than the useful life of the vessels. Petitioner may not depreciate the expenditures over a period of time less than the remaining useful life of the vessels.
*76 This proceeding involves deficiencies in income and excess profits taxes for petitioner's taxable period ended November 30, 1951. Respondent determined deficiencies for that period in the amount of $ 345,734.94, determining that the following deductions claimed by petitioner were not allowable:
| (a) Repairs | $ 550,846.78 |
| (b) Depreciation | 98,266.37 |
| (c) Account 090 adjustments | 3,853.66 |
Only the first item is in controversy; the issues involving depreciation and account 090 adjustments were disposed of in the stipulation of facts filed by the parties at the hearing of this case. The item of $ 550,846.78 claimed*60 by petitioner as a deduction for repairs consisted of expenditures for certain tests, repairs, and inspections performed upon eight vessels purchased by petitioner during the period in question, such expenditures being necessary to place the vessels "in class."
The following issues are presented for decision:
(1) Whether the in-class expenditures were properly deducted by petitioner as business expenses in its return for the period ended November 30, 1951.
(2) In the alternative, if petitioner be required to capitalize the expenditures: (a) Whether the expenditures may be amortized or depreciated over a period of time less than the useful life of the vessels with respect to which they were incurred, and (b) if so, a determination of the period of time over which the expenditures may be amortized or depreciated.
FINDINGS OF FACT.
The facts have been stipulated and the stipulation of facts, together with the exhibits attached thereto, is incorporated herein by reference.
The petitioner, Bloomfield Steamship Company, is a corporation organized under the laws of the State of Delaware and has its principal place of business in Houston, Texas.
The petitioner filed its corporation income*61 tax return for the taxable period beginning December 29, 1950, and ending November 30, 1951, with the collector of internal revenue, Austin, Texas.
The petitioner was incorporated on December 29, 1950.
The petitioner keeps its books and files its tax returns on an accrual basis.
Shortly after its incorporation, the petitioner made application to the Maritime Administration for the purchase of certain war-built vessels under section 4 of the Merchant Ship Sales Act of 1946, Pub. L. 321. Pursuant to the application and approval thereof, the petitioner and the Maritime Administration on January 15, 1951, entered into a *77 contract for the purchase and sale of five Victory- and three Liberty-type vessels. Simultaneously with the execution of the contract, the petitioner was required to pay and did pay to the Maritime Administration a downpayment of 10 per cent of the unadjusted statutory sales price of each vessel, being $ 97,000 per Victory-type vessel and $ 63,900 per Liberty-type vessel. Actually petitioner paid $ 97,900 downpayment on each Victory-type vessel and credit was given for the $ 900 excess.
After execution of the ship purchase contract it was necessary to determine*62 the cost of in-class repairs and the presence or absence of desirable features so as to fix the amount petitioner would have to pay to the Maritime Commission to secure title to the vessels.
In-class repairs are those items of work which the purchaser and surveyors representing the Maritime Administration, the United States Coast Guard, the American Bureau of Shipping, and other regulatory agencies consider necessary to restore the vessels' class with valid certificates of classification and inspection and to place the vessels in the seaworthy and cargoworthy condition required by applicable laws and regulations as prerequisites to operation of the vessels. These valid certificates of classification and inspection are certificates (or endorsements on certificates) which evidence that certain inspections, surveys, and tests have been satisfactorily conducted as required by the American Bureau of Shipping and the United States Coast Guard for the safety of life at sea and for insurance purposes. The American Bureau of Shipping is an independent classification society recognized by the United States Government for classifying purposes.
Following the execution of the contract, the Waterman*63 Steamship Corporation, an approved general agent for the Maritime Administration and selected by the petitioner, took charge of the vessels and made arrangements to remove six of the eight vessels from Maritime Administration Reserve Fleets in the Gulf Coast area. These ships were towed to nearby drydocks to permit the purchaser, representatives of the Maritime Administration, and surveyors from the several regulatory and classification agencies to survey the condition of the underwater portion of each ship's hull, rudder, sea valves, propeller, and the like.
The nature and scope of the inspections, surveys, and tests to which the vessels were subjected, the agencies conducting such inspections, surveys, and tests, and nature of repairs necessitated thereby are as follows:
A. Annual Classification Survey. -- This survey is required by the American Bureau of Shipping annually and requires drydocking the vessel. All parts of the steering machinery; the sluice valves, watertight doors in bulkheads and vessel's sides, closing appliances in *78 superstructure bulkheads and for air and sounding pipes; ventilator and hatchway coamings, tarpaulins, hatch covers; all parts particularly*64 liable to rapid deterioration; machinery casings, guardrails, and all other means of protection for openings and for access to the crew's quarters are all examined, repaired as found necessary, and reported upon. This survey is usually made concurrently with the annual survey of machinery and boilers as certain portions of that survey also must be carried out while the vessel is in drydock.
B. United States Coast Guard -- Merchant Marine Inspection. -- This inspection is required annually by the United States Coast Guard. It includes an inspection of the structure, boilers, machinery, and equipment. The inspection is such as to insure that the structure, boilers and their appurtenances, piping, main and auxiliary machinery, electrical installations, life-saving appliances, fire-detecting and -extinguishing equipment, and other equipment are in satisfactory condition and fit for the service for which intended, that they comply with applicable regulations, and that the radio installations, including fixed and portable radios for lifeboats, are in compliance with the requirements of the Federal Communications Commission.
C. Special Survey. -- This survey is required by the*65 American Bureau of Shipping at 4-year intervals; however, in certain instances a year of grace is allowed in accordance with the American Bureau of Shipping rules. A special survey requires drydocking for inspection of the underwater body of the vessel, sea chests and strainers, sea valves, rudder, rudder pintles, gudgeons, stern frame, and the like. It includes all items of the annual classification survey and a great deal more. Virtually every portion of the vessel and all of its equipment, including boilers and machinery, are tested and/or examined to determine the extent of wear, deterioration, or damage and repaired as found necessary to return to satisfactory operating condition. For example, the main turbines, main reduction gears, and all auxiliaries, including pumps, turbines, reduction gears, couplings, and bearings, are cleaned to facilitate inspection and are inspected. Any defects found to exist are corrected after which the main and auxiliary machinery is reassembled and tanks which may have been opened for internal examination are closed. In short, the vessel is completely examined, and defects found are corrected so as to place the vessel in satisfactory operating*66 condition.
D. Tail Shaft Inspection. -- Both the American Bureau of Shipping and the United States Coast Guard, Merchant Marine Inspection, require that the tail shafts be drawn for inspection at least once every 3 years on Victory-type vessels and at least once every 2 years on Liberty-type vessels.
*79 E. Annual Survey of Machinery and Boilers. -- This survey is required annually by the American Bureau of Shipping. In order to facilitate this inspection it is necessary to clean the fire and water sides of the boilers, to open at least one manhole on each of two steam drums, to remove the boiler casing doors in the way of the waterwell headers, superheater headers and return bends, generating tubes, economizers, and to remove the handhole plates as requested by the surveyor in attendance in the way of economizers, generating and screening tubes, waterwall tubes, and superheater tubes to permit internal examination of waterwall legs, superheater headers, boiler headers, steam drums, and tubes. In addition, a general inspection of engines, boilers, steering machinery, windlass, and fire-extinguishing apparatus is made. The propeller, stern bushing, sea connections, *67 and their fastenings are examined. Watertube, cylindrical, and donkey boilers, superheaters, and economizers, together with the principal boiler mountings are examined internally and externally. Safety valves are set to the working pressure. Where desirable, the actual thickness of plates and strength of stays are ascertained in order to determine the future pressure, and the boilers and superheaters are subjected to hydrostatic pressure tests. Main steampipes are tested under hydrostatic pressure and, where desirable, the actual thickness is ascertained to determine the future working pressure.
F. International Loadline Renewal or Endorsement of Certificate. -- The international loadline certificate is renewed every 5 years, but it is endorsed annually by the American Bureau of Shipping surveyor in attendance. During the annual classification survey, it must be determined that no material alteration has been made in the hull, superstructures, or means of closing openings in superstructures which affects the position of loadlines.
G. Pressure Vessels Inspection. -- This inspection is required by the United States Coast Guard once every 2 years, and suitable entry is*68 made on the certificate of inspection.
H. Boiler Valves and Mountings Inspection. -- The boiler valves and mountings are required to be opened for examination by the American Bureau of Shipping annually, and are required to be removed from the shell of the boilers for examination of studs by the United States Coast Guard, Merchant Marine Inspection, every 8 years.
I. Radiotelegraph Inspection. -- This inspection is required by the United States Coast Guard annually. The inspection is made by representatives of the Federal Communications Commission, and the safety radiotelegraph certificate is issued by that agency. The inspection consists of examining and testing all radio equipment on the vessel, such as main radiotelegraphy station, radiotelephone, and radio direction finder.
*80 Five vessels (SSDevils Lake Victory, SSSt. John's Victory, SSFrank E. Spencer, SSEdward L. Grant, and SSLloyd S. Carlson) required the American Bureau of Shipping annual classification survey and inspection and a 4-year periodic special survey. The same five vessels and one additional vessel (SSSpartanburg Victory) required the United States Coast Guard annual*69 classification survey and inspection.
Two vessels, SSFisk Victory and SS Legion Victory (which were then being operated by other companies under bareboat charters from the Maritime Administration) had previously undergone their respective periodic special surveys and inspections and for that reason were not placed in drydock at this time, but they were, nevertheless, carefully surveyed afloat.
Seven vessels (all except SSSt. John's Victory) were fitted with, and required the removal of, certain wartime defense features. There were gun tubs forward and aft, and machinegun tubs were mounted on the bridge and on the amidships house. Also, there were two or more machinegun tubs on the afterdeck. The wheelhouse, chartroom, and radio shack were covered with plastic armour or heavy plating. Ammunition lockers were fitted in the forward end of the upper 'tween deck in No. 1 cargo hold and in the after end of the 'tween deck in No. 5 cargo hold, as well as in sections below the deck in the poop space. Certain quarters were also fitted for use by the gunnery officer and guncrew. None of these installations was necessary, useful, or desirable in the peacetime operation of*70 cargo vessels. In order to avoid useless and costly maintenance of the equipment and to avoid the obstruction of view in the navigation of the vessel, these fittings were removed.
Following the surveys and inspections of all of the vessels, the petitioner prepared specifications covering the opening, examination, and closing of each ship's main and auxiliary machinery, repairs to machinery found to be defective, removal of wartime defense features, and all other items of work which the purchaser and the surveyors, representing the Maritime Administration, the United States Coast Guard, the American Bureau of Shipping, and other regulatory agencies, considered necessary to restore the vessel's class with valid certificates and to place the vessels in the seaworthy and cargoworthy condition required by applicable laws and regulations as prerequisites to operation of the vessels. These repair and inspection specifications prepared by petitioner were screened by the Maritime Administration and submitted to various Gulf Coast shipyards for competitive bids.
After receipt of competitive bids and awarding of contracts to the respective low-bidding contractors, each vessel was moved by *71 the Waterman Steamship Company to the shipyard of the respective low-bidding *81 contractor, where the inspections, repairs, and removal of the wartime defense features were accomplished.
Upon completion of the work, each vessel underwent various tests and tryouts, the regulatory agencies satisfied themselves that the necessary work had been performed, and all certificates were issued in proper order.
Each contractor produced its itemized bill of cost, which was paid by petitioner, and which was reviewed by Maritime Administration personnel in the Gulf Coast area and by the petitioner to determine the allowances to be made for in-class repairs and the presence or absence of desirable features.
The determination of the personnel in the field was then transmitted to the Maritime Administration which proceeded to draft the various closing documents, including the note for the balance of the purchase price and the mortgage on the ship securing the note.
The actual cost of placing each vessel in class, its percentage of the floor price of each vessel as determined in accordance with the Merchant Ship Sales Act of 1946, the cost of placing each vessel in class which was allowed by the*72 Maritime Administration, its percentage of the floor price of the vessel, the difference between the actual cost and the allowed cost, and its percentage of the actual cost, are as follows:
| Per cent | |||
| Vessel | Actual cost | of floor | Allowed cost |
| price | |||
| SS Devils Lake Victory | $ 136,958.59 | 15.578 | $ 136,843.00 |
| SS St. John's Victory | 107,466.84 | 12.224 | 106,746.00 |
| SS Spartanburg Victory | 26,489.84 | 3.013 | 24,920.84 |
| SS Legion Victory | 7,171.00 | 0.816 | 7,175.00 |
| SS Fisk Victory | 5,641.50 | 0.642 | 5,675.00 |
| SS Frank E. Spencer | 84,964.00 | 15.604 | 82,749.00 |
| SS Edward L. Grant | 105,859.51 | 19.441 | 105,693.00 |
| SS Lloyd S. Carlson | 76,295.50 | 14.012 | 70,543.00 |
| Total | 550,846.78 | 9.136 | 540,344.84 |
| Difference | |||
| Per cent | between | Per cent | |
| of floor | actual and | disallowed | |
| Vessel | price | allowed | |
| cost | |||
| SS Devils Lake Victory | 15.565 | $ 115.59 | 0.0844 |
| SS St. John's Victory | 12.142 | 720.84 | 0.6708 |
| SS Spartanburg Victory | 2.835 | 1,569.00 | 5.9230 |
| SS Legion Victory | 0.816 | (4.00) | |
| SS Fisk Victory | 0.646 | (33.50) | |
| SS Frank E. Spencer | 15.197 | 2,215.00 | 2.6070 |
| SS Edward L. Grant | 19.411 | 166.51 | 0.1573 |
| SS Lloyd S. Carlson | 12.955 | 5,752.50 | 7.5398 |
| Total | 8.962 | 10,501.94 | 1.9050 |
*73 The expenditures did not extend the useful lives of the vessels, did not increase the capacity of the vessels, and did not involve entirely different and new types of equipment.
The closing documents were then transmitted with letters of instruction from the assistant general counsel, Maritime Administration, to the district counsel of the Maritime Administration at New Orleans, Louisiana, with copies to petitioner. Upon receipt by the district counsel, Maritime Administration, of the transmittal letters, sales were closed and title to the vessels was transferred to the petitioner in the United States customhouse at Houston, Texas. Upon each closing, a deputy collector of customs telephoned the collector of *82 customs at the port where the vessel was then located to announce that title to the vessel had just passed to the petitioner and to authorize the issuance of a temporary register for the ship.
After closing, and after the petitioner had paid the shipyards and had furnished certified paid invoices to the Maritime Administration, the Maritime Administration furnished to the petitioner a memorandum invoice setting forth the final statement of the terms of the sale.
The *74 unadjusted statutory sales price and the floor price of each vessel as determined by the Maritime Administration and published in 11 F.R. 4459, et seq., the purchase price of each vessel as set forth in the contract between the petitioner and the Maritime Administration, and the contract price of each vessel as shown on the memorandum invoices supplied petitioner by the Maritime Administration are as follows:
| Unadjusted | Purchase | Contract | ||
| Vessel | statutory | Floor price | price as per | price as per |
| sales price | contract of | memorandum | ||
| sale | invoices | |||
| SS Devils Lake Victory | $ 979,000 | $ 879,157 | $ 879,157 | $ 879,157 |
| SS St. John's Victory | 979,000 | 879,157 | 879,157 | 879,157 |
| SS Spartanburg Victory | 979,000 | 879,157 | 879,157 | 879,157 |
| SS Legion Victory | 979,000 | 879,157 | 879,157 | 879,157 |
| SS Fisk Victory | 979,000 | 879,157 | 879,157 | 879,157 |
| SS Frank E. Spencer | 639,000 | 544,506 | 544,506 | 544,506 |
| SS Edward L. Grant | 639,000 | 544,506 | 544,506 | 544,506 |
| SS Lloyd S. Carlson | 639,000 | 544,506 | 544,506 | 544,506 |
| Total | 6,812,000 | 6,029,303 | 6,029,303 | 6,029,303 |
In 1956 and 1957, the petitioner exchanged the five Victory-type vessels*75 for four C-2-type vessels. In 1953, the SSFrank E. Spencer was sold for $ 500,000 and the SSLloyd S. Carlson was sold for $ 550,000. In 1954, the SSEdward L. Grant was sold for $ 370,000.
In its income tax return for its fiscal year ending November 30, 1951, the petitioner deducted as a business expense the amount of $ 550,846.78 expended to qualify the vessels for operation. The Commissioner disallowed the deduction and explained the disallowance in the deficiency notice as follows:
(a) It has been determined that the in class allowances and expenditures aggregating $ 550,846.78 claimed by you as a deduction for repairs represent additional cost of the vessels purchased and deduction of the amount has been disallowed.
In a stipulation of facts filed in this proceeding on April 30, 1958, the parties stipulated as follows:
26. It is agreed by the petitioner and the respondent that the expenditures here in question totaling $ 550,846.78 would be allowable as ordinary and necessary business expenses in the year in which made if incurred in a year other than the year of purchase of the vessels. The expenditures did not extend the useful lives of the vessels. The expenditures*76 did not increase the capacity of *83 the vessels. The expenditures did not involve entirely different and new types of equipment.
Also, in a supplemental stipulation of facts filed April 20, 1959, the parties stipulated as follows:
It is hereby stipulated that, for the purpose of this case, the following statement may be accepted as fact:
In taking charge of the vessels and moving them to the shipyards where the class work was performed, and throughout the period of performance of the class work, Waterman Steamship Corporation was acting as Petitioner's agent. In other matters Waterman Steamship Corporation was an approved general agent for the Maritime Administration.
OPINION.
The first issue here presented arises under section 23(a)(1)(A) of the 1939 Code. 1 Petitioner contends that the expenditures made to repair the vessels it purchased from the Maritime Administration, so as to place the vessels in class, that is, in seaworthy and cargoworthy condition, are deductible as ordinary and necessary business expenses. The respondent contends that deduction of these expenses as ordinary and necessary business expenses is banned by section 24(a)(2) of the 1939 Code. 2*78 Regulations*77 111, section 29.23 (a)-4, 3 define repairs, the cost of which is deductible. This section of Regulations 111 has been sustained because it is neither unreasonable nor inconsistent with section 23(a)(1)(A) of the 1939 Code. Jones v. Commissioner, 242 F. 2d 616, 620, affirming 24 T.C. 563">24 T.C. 563.
It is clear, both from Regulations 111, section 29.23(a)-4, and from the numerous cases cited on brief, that not all expenses incurred in repairing property are deductible. The repair costs, deduction of which is allowable, are the costs of "incidental repairs." "Incidental" imports that the repairs be necessary to some other action. In this *84 context in Illinois Merchants Trust Co., Executor, 4 B.T.A. 103">4 B.T.A. 103, 106, we said:
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 keeps the property in an operating condition over its probable useful life for the uses*79 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. * * *
This precise language was quoted with approval in the Jones case, supra. Deductible repair expenses are those incidental to maintaining business property, incidental to the keeping of the property in "an ordinarily efficient operating condition." Repairs incidental to capital expenditures for remodeling or renovation of the property are not deductible. Jones v. Commissioner, supra;I. M. Cowell, 18 B.T.A. 997">18 B.T.A. 997. Likewise, repairs incidental to capital expenditures for the acquisition of property suitable to the business of the taxpayer, regardless of whether the cost of the repairs is paid to the seller or to a third person, are not deductible. H. Wilensky & Sons Co., 7 B.T.A. 693">7 B.T.A. 693; L. A. Wells Construction Co., 46 B.T.A. 302">46 B.T.A. 302, affirmed per curiam 134 F. 2d 623, certiorari denied*80 319 U.S. 771">319 U.S. 771. See also the recent decision of the Third Circuit in Stoeltzing v. Commissioner, 266 F. 2d 374, affirming a Memorandum Opinion of this Court. In that case, the court, among other things, said at page 376: "We think, as the Tax Court in effect found, that the repairs were necessary to put, rather than to 'keep', the building in an 'ordinarily efficient operating condition'." It seems to us clear that the $ 550,846.78 here in question was, as said by the court in the Stoeltzing case, expended to put rather than to "keep" the ships in an ordinarily efficient operating condition. One of the cases relied upon by the Third Circuit in the Stoeltzing case was Jones v. Commissioner, supra, which we have already cited and discussed.
We have said in other cases that in determining whether moneys expended are deductible business expenses or nondeductible capital expenditures, the purpose of the work performed, the physical nature of the work, and the effect of the work must be considered. American Bemberg Corporation, 10 T.C. 361">10 T.C. 361, affirmed*81 per curiam 177 F.2d 200">177 F. 2d 200.
In the instant case, petitioner, a steamship company, approached the Maritime Administration for the purpose of purchasing vessels under the Merchant Ship Sales Act of 1946. The Committee on the Merchant Marine and Fisheries, in reporting the bill to the House of Representatives, stated that the purpose of the bill was to place the American merchant marine "in a position to assume its rightful place among the other maritime nations in the carriage of the world's waterborne commerce." H. Rept. No. 831, 79th Cong., 2d Sess. (1945). *85 A declaration of policy contained in the Act itself states that it is necessary to have an efficient and adequate American-owned merchant marine composed of the "best-equipped, safest, and most suitable types of vessels." 50 U.S.C. App. sec. 1735. The Act further provides that an applicant for purchase of such vessels must "possess the ability, experience, financial resources, and other qualifications necessary to operate and maintain the vessel under normal competitive conditions." 50 U.S.C. App. sec. 1737(a). The Act*82 also provides that an allowance shall be made in determining the amount which the purchaser shall pay to the Maritime Administration for the vessel. 50 U.S.C. App. sec. 1736(d)(1). A separate section of the Act authorized expenditures "to make such vessel suitable for commercial operation on trade routes or services." 50 U.S.C. App. sec. 1745(a). By the Independent Offices Appropriation Act of 1948, 46 U.S.C. sec. 864(a), the expenditure of funds by the Maritime Administration to place vessels in class was no longer authorized, but the allowance of such costs determined on the basis of competitive bids, without regard to previously established floor prices below which the vessels could not be sold, was authorized. 4 The petitioner herein applied for and received an allowance for the cost of in-class repairs either by way of a reduction in the purchase price of the vessels or as a credit against the purchase price. Whichever it was, it seems to us, has no controlling importance in deciding the question we have here to decide.
*83 It is clear, therefore, that the Maritime Administration sold, and petitioner purchased eight validly certificated, seaworthy and cargoworthy vessels. The cost to petitioner of acquiring such vessels was the amount petitioner paid and/or obligated itself to pay to the Maritime Administration, plus the amounts petitioner paid to the shipyards which made the repairs so that petitioner might reduce the amount it had to pay the Maritime Administration below the floor price. The cost of the allowance was the price of the repairs. Unquestionably, the purpose of the expenditure of $ 550,846.78 by the petitioner was a part of its plan to acquire eight vessels in seaworthy and cargoworthy condition. Petitioner, in arguing that the entire $ 550,846.78 should be allowed as a deduction for repairs in the taxable year which we have before us, relies heavily on certain language embodied in paragraph 26 of the stipulation of facts which was filed at the hearing. This language upon which petitioner relies reads as follows:
26. It is agreed by the petitioner and the respondent that the expenditures here in question totaling $ 550,846.78 would be allowable as ordinary and necessary *86 business*84 expenses in the year in which made if incurred in a year other than the year of purchase of the vessels. * * *
In the first place, the foregoing stipulation is not a stipulation of a fact at all and for that reason we have not embodied it in our Findings of Fact. It is a stipulation of what the tax consequences would be if the expenditures had been made during some period which is not before us for adjudication. A stipulation of that kind is, in our opinion, irrelevant and immaterial to the question we have before us in issue 1. Cf. Ohio Clover Leaf Dairy Co., 8 B.T.A. 1249">8 B.T.A. 1249, affirmed per curiam 34 F. 2d 1022, certiorari denied 280 U.S. 588">280 U.S. 588. Therefore, we decline to spend any time in discussing what the tax consequences would have been if the $ 550,846.78 had been expended in some year other than the year of purchase. We do have before us the year of purchase and we hold that the $ 550,846.78 expended by petitioner in repair of the eight vessels was not an expense incidental to the maintenance of the vessels, but was, rather, an expense incidental to the capital expenditure in acquiring and putting*85 into service eight commercial dry-cargo vessels in seaworthy and cargoworthy condition. The respondent's disallowance of the deduction is sustained on the strength of the authorities heretofore cited and discussed.
The second issue here presented arises under section 23(l)(1), 1939 Code. 5 Petitioner states the alternative issue in its brief as follows:
In the alternative, if petitioner be required to capitalize the expenditures they may be amortized or depreciated over a period of time less than the useful life of the vessels.
In arguing this point in its brief petitioner, among other things, said:
the most proper treatment would be to amortize them over the period beginning with the date they were incurred and ending November 30, 1951. This would prevent any distortion of petitioner's income and would result in allocation of the expenditures against the income to which they were attributable.
Thus petitioner seeks to offset the disallowance of the deduction by recovering the same in depreciation. The contention is based upon the erroneous and unsupported supposition that the useful life of the work done to place the vessels in class is less than 1 year because some of*86 the inspections, tests, and surveys which necessitated the work are annually recurring. Petitioner has failed to show that any of the work had a useful life of less than 1 year, for it failed to show that any of the work done in 1951 would be required to be done again for the next year's annual inspections. On the contrary, the removal of wartime features would last as long as the vessels.
The capital asset which petitioner received from the Maritime Administration when all was done was eight seaworthy and cargoworthy *87 vessels and the capital cost of these vessels was the price paid for them which, under our decision as to issue 1, included the $ 550,846.78 expended to put the vessels in class. Had petitioner held the vessels for the periods of time which it agreed in the stipulation*87 of facts filed herein to be the remaining useful lives of the vessels, it could have finished the period, having taken deductions for current maintenance and depreciation on the entire capital asset in the intervening years with eight bare hulls of an agreed salvage value.
Petitioner's alternative contention is denied and we hold that the useful life of the in-class work is identical to the useful lives of the vessels on which such work was performed.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(a) Expenses. --
(1) Trade or business expenses. --
(A) In General. -- All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * * * and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. * * *↩
2. SEC. 24. ITEMS NOT DEDUCTIBLE.
(a) General Rule. -- In computing net income no deduction shall in any case be allowed in respect of --
* * * *
(2) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate, except expenditures for the development of mines or deposits deductible under section 23(cc);↩
3. Sec. 29.23(a)-4. Repairs. -- The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as expense, provided the plant or property account is not increased by the amount of such expenditures. * * *↩
4. Regulations of the administrative agency charged with the sale of such vessels clearly indicate an intent, and provide a procedure to make available vessels which will be ready, when purchased, for use of commercial cargo vessels, in accordance with the legislative enactment, 46 C.F.R. sec. 299.1, (Rev. 1953) et seq↩; N.B. secs. 299.7(a), 299.7(c), 299.71B, 299.71F, and 299.91.
5. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
(1) Depreciation. -- 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↩