*4311 Where a taxpayer had certain work done to its banking rooms, including alterations and improvements, and neither the character nor the cost of the different items was shown, the determination of the Commissioner disallowing certain items as ordinary and necessary expenses will not be disturbed.
*1043 This is a proceeding for the redetermination of a deficiency in income and profits tax for the calendar year 1920 in the sum of $398.83, which arose from the refusal of the Commissioner to allow deductions in the total amount of $10,191.79 as ordinary and necessary expenses. At the trial of the case the petitioner was unable to adduce testimony as to part of this total and attempted to prove, as ordinary and necessary expenses, items in the aggregate amount of $7,024.25.
FINDINGS OF FACT.
The petitioner is a corporation organized and existing under the laws of the United States, and at the time of filing the petition in this case had its principal office at 1315 F Street, Northwest, Washington, D.C. It was formed by a consolidation of the American*4312 National Bank and the Federal National Bank in November, 1922. *1044 The American National Bank was organized and commenced business on April 9, 1903, and about September, 1905, purchased a nine story building at 1315-17 F Street, Northwest, Washington, D.C., remodeled the first floor and used it for its offices.
Sometime during the latter part of 1919 or early in 1920, the American National Bank (hereinafter called the bank) decided to have certain work done to its offices, including repainting and frescoing the walls, and at the same time to have certain alterations made in the floor space of the bank by changing the style and position of the tellers' cages, executive offices and waiting rooms. A plan of the proposed alterations was prepared by an architect, and submitted to the Derby Equipment Co., contractors specializing in the construction and remodeling of banks and other public buildings. The latter company made an estimate as to the cost of the work and submitted its proposal in writing and this proposal was accepted by the bank. The work was finished by the Derby Equipment Co. during the year 1920.
From time to time as the work progressed it was paid for*4313 by checks of the bank on presentation of the architect's certificates. Upon payment of the amount called for by a certificate, the contractor executed a receipt for such payment attached to the certificate.
The work finally performed consisted of tearing down and altering teller's cages, recutting certain of the old marble and installing some new marble, replacing some tile floor by wood, and scraping and polishing the wood floor, changing the height of the panel work, alteration of granite work, installation of some new glass, changing counters and installation of some new counters, alterations to the bank vault, changes in the wainscoting and stairway, and installation of new furniture and reupholstering and finishing some of the old furniture. No changes were made in the outside wall of the banking room but the location and size of tellers' cages, executive offices and waiting rooms were changed. Certain of the old bronze work which was torn down was not used again and the new material used in the alterations consisted of wooden counters, glass, a small amount of marble and certain new furniture.
The bank deducted from its gross income as ordinary and necessary expenses*4314 the total cost of the work performed, but the Commissioner considered the following items to be capital expenditures and disallowed their deductions from gross income:
| Date of charge | Item | Amount |
| 1920 | ||
| Feb. 3 | The Derby Equipment Co | $1,500.00 |
| Feb. 9 | do | 1,200.00 |
| Feb. 17 | George G. Rabbit, electrical contractor | 1,040.28 |
| Feb. 20 | The Derby Equipment Co. on general contract | 1,500.10 |
| June 9 | James B. Henderson to supplying 2-inch rope covered with velvet and fixtures, for 2 entrances to offices. | 17.50 |
| To 2 240 Karnak Wilton rugs 8-3 by 10, at $139.75 | 279.50 | |
| To 1 Sedan Wilton rug, 3-3 by 10 | 126.25 | |
| To 2 doormats, $4.15 | 8.30 | |
| To 2 parabolas for ladies' desks | 26.00 | |
| To window shades for front of banking room | 104.50 | |
| To cleaning off and refinishing floor of ladies' room; finishing stringer of stairway in mahogany; cleaning up vault door and frame; painting rear wall where cases were removed, section of wall in hall, new grille in teller's cage; finishing cage of revolving doors in metal, globes, new sash, also painting sash after alterations and repairing Caenstone (distribution estimated as). | 50.00 | |
| To Austrian shades for upper front windows of banking room | 405.65 | |
| 3 Emralite portables with cord and plugs | 42.00 | |
| Hugh Reilly Co., cutting, drilling, and polishing plate glass, constructing new check desks and old material, per. | 38.00 | |
| Mar. 9 | Derby Equipment Co | 1,000.00 |
| Mar. 25 | Unidentified | 212.65 |
| Apr. 2 | B. Stanley Simmons, commission to architect | 500.00 |
| Apr. 5 | do | 88.50 |
| May 8 | do | 46.90 |
| May 28 | do | 44.10 |
| June 4 | Derby Equipment Co | 1,125.50 |
| June 9 | National Mosaic Co., plastering | 43.39 |
| Fred S. Gichner, metal work | 56.60 | |
| July 17 | B. Stanley Simmons, commission to architect | 31.62 |
| July 21 | do | 500.00 |
| Aug. 14 | do | 150.00 |
| Sept. 20 | do | 54.45 |
| Total | 10,191.79 |
*4315 *1045 The Commissioner computed the bank's income on the cash receipts and disbursements basis.
OPINION.
MURDOCK: In , and , we discussed at some length the difference between those expenditures properly designated ordinary and necessary expenses and those which are capital items. From the discussion in the latter case, it is apparent that the cost of repairs for the purpose of mending property or restoring it to a sound state, or for the purpose of keeping property in an ordinarily efficient operating condition is deductible as an ordinary and necessary expense, while the cost of alterations or improvements not needed for such purposes or which make the property adaptable to a different use is to be considered a capital expenditure. The Supreme Court has indicated the difference between the two classes of expenditures in , p. 420, as follows:
* * * Theoretically, the expenses chargeable to earnings include the general expenses of keeping up the organization*4316 of the company, and all expenses incurred in operating the works and keeping them in good condition and repair; whilst expenses chargeable to capital include those which are incurred in the original construction of the works, and in the subsequent enlargement and improvement thereof. *1046 and again, in , pp. 462, 463, the court states as follows:
* * * It would seem as if expenditures for additions to construction and equipment, as expenditures for original construction and equipment, should be reimbursed by all of the traffic they accommodate during the period of their duration, and that improvements that will last many years will not be charged wholly against the revenue of a single year.
* * *
* * * We think it is clear, that instrumentalities which are to be used for years should not be paid for by the revenues of a day or year; and this is the principal of returns upon capital which exists in durable shape.
Much of the work performed on the banking room was not in the nature of repairs. The appearance of the whole interior was greatly altered and the location and style*4317 of tellers' cages, executive offices and waiting rooms were changed. These were undoubtedly alterations and were in no sense made for the purpose of restoring the property to a sound state or of keeping it in an ordinarily efficient operating condition. The fact that very little new material was used is not controlling; much of the old material was recut and refinished and adapted to new uses and purposes. In this sense it was an improvement which facilitated the business of the bank and made its offices more attractive and more accessible to its patrons according to the testimony of the only officer of the bank who was called as a witness.
The petitioner in its pleadings admitted that $2,337.98 of the total amount in dispute was a capital expenditure and not deductible, but it did not state what item this sum represented. At the trial it abandoned its claim for deduction of the following items:
| B. Stanley Simmons, architect's fee | $1,000.00 |
| B. Stanley Simmons, sundry items | 415.57 |
| National Mosaic Co | 43.39 |
| Fred S. Gichner | 56.60 |
| Total | 1,515.56 |
The petitioner offered in evidence three architect's certificates with receipts of the contractor attached, in*4318 the respective amounts of $1,500, $1,200 and $1,500.10, or a total of $4,200.10, but none of the certificates or receipts stated the nature or extent of the work or materials for which such certificate was issued and for which payment was made.
Although some of the expenditures may have been ordinary and necessary expenses, since neither their character nor cost has been shown, we are unable to segregate any such items and can not determine what part, if any, of the expenditures is deductible. North*1047 ; .
Judgment will be entered for the respondent.
Considered by MORRIS, SIEFKIN, and TRAMMELL.