*1961 1. Amount expended for the preparation of a sketch showing desirable improvements on land being held for sale, held to be deductible as an ordinary and necessary business expense.
2. Fees paid for preparing plans and specifications for the construction of buildings disallowed as deductible losses because of failure to show that the projects were abandoned in the taxable year.
*1324 This proceeding involves the redetermination of a deficiency of $22,555.51 in income tax for 1924. The issue is whether certain items are deductible as ordinary and necessary business expenses.
FINDINGS OF FACT.
On December 20, 1922, the petitioner, a corporation with a place of business in New York, N.Y., acquired 194,335.36 square feet of land in the center of Jersey City, N.J., from H. S. Kerbaugh in exchange for all of its capital stock. Petitioner was organized for the express purpose of acquiring and subsequently selling this tract of land. Kerbaugh was the president and sole stockholder of petitioner in 1923 and 1924. *1962 Petitioner's sole activities in those years consisted of endeavoring to sell this land. Its returns for 1923 and 1924 were made on the cash basis.
*1325 On October 1, 1923, Kerbaugh paid the sum of $800 to A. B. Cohen, a consulting engineer, for services rendered petitioner in drawing a large sketch showing the layout of petitioner's property with pictures of buildings on each plot illustrating the type of improvement he regarded as suitable for the site. This sketch was used in and after 1924 for the purpose of inducing prospective purchasers to buy by demonstrating the kind of improvements which might profitably be made.
On September 10, 1924, and December 23, 1924, Kerbaugh paid Cohen $1,000 and $2,000, respectively, in part payment for services performed, and to be performed, for petitioner in preparing plans and specifications for the erection by petitioner of a 700-car garage, an office building and apartment house on lots owned by petitioner. The plans and specifications for all of the improvements were not completed until after February 26, 1925. Bids were received for the construction of the garage. It was never built because of the refusal of the city to*1963 grant a permit for its erection. The other improvements were not made for reasons not disclosed by the record.
Petitioner had no income in 1922 and 1923. In 1924 it realized income from the disposal of one of its pieces of property under condemnation proceedings. Petitioner borrowed money from a bank. In and prior to 1924 Kerbaugh borrowed about $250,000 from petitioner.
Whenever Kerbaugh had funds and petitioner lacked money, instead of transferring money into the corporation's account, Kerbaugh would draw his own check and charge the amount to petitioner. He also used petitioner's funds at times when he lacked money.
An open account was kept on petitioner's books with Kerbaugh. Bills were rendered to him from month to month for the amount of his indebtedness. The indebtedness of Kerbaugh to petitioner has been reduced by payments such as those made to Cohen. The balance sheet prepared by petitioner on April 30, 1925, and a bill rendered on that date by Kerbaugh to petitioner, contain appropriate entries for the three payments made by Kerbaugh to Cohen.
OPINION.
ARUNDELL: Counsel for the petitioner abandoned the issue raised as to the proper basis for computing*1964 the profit realized in 1924 on the sale of a portion of the real estate acquired from Kerbaugh in 1922, and the deductibility of a net loss sustained in 1922. Respondent's counsel conceded at the hearing that the sum of $2,000 paid by petitioner in 1924 for 1923 taxes is deductible. Counsel for the parties agreed that if the item of $800 is deductible as a business expense, this amount, instead of $169.39 shown on the return as a *1326 net loss, would constitute a net loss in 1923 to be carried forward into 1924. This action of the parties leaves for decision the question of whether the items of $800, $1,000, and $2,000 are deductible as ordinary and necessary business expenses, as contended by petitioner, or whether they should be capitablized as contended by respondent. No point is now being made by respondent that the fees were not paid by petitioner in the first instance.
The sketch prepared for petitioner in 1923 at a cost of $800 was procured and used for the purpose of demonstrating the suitability of lots in the tract of land for certain types of buildings. While the drawing might prove useful until the entire property was disposed of, the expenditure was so*1965 essentially a selling expense that we think its deduction should be allowed as an ordinary and necessary expense of carrying on a trade or business.
The sums of $1,000 and $2,000 paid to Cohen for drawing plans and specifications for a garage and other buildings seem to us to fall into a different category. These plans were not to be used as "sales talk" in disposing of the vacant land. Petitioner conceived the idea of itself building on a portion of the property, and to that end had plans drawn. Sums expended for architects' services under such circumstances are capital expenditures and are to be added to the cost of the building the same as expenditures of labor and material used in its construction. The garage project was abandoned on the refusal of the city to issue a permit for its erection. The findings do not disclose when this took place or the year when the decision was reached to abandon the other two projects, but apparently it was subsequent to 1924, as Cohen was still working on some or all of the plans as late as February 26, 1925. The respondent's action in disallowing any deduction for these expenditures must be sustained. They constitute deductible losses*1966 in the year in which the building project was abandoned. .
Decision will be entered under Rule 50.