*74 Decisions will be entered for petitioners.
Petitioner, who owned farms for the production of income which had been under cultivation for many years, sought to check and reduce water erosion and loss of top soil by terracing his farms in accordance with approved specifications. Terraces were made by pushing the earth into ridges following the contours of the land. Nothing new was added to the farms. The purpose was not to change the use of the land, or to prepare it for use, or for new and additional uses, but was to maintain the productivity of the farms in normal and customary operation. Held, the expenditures for farm terracing were essentially for maintenance and conservation and as such are deductible as ordinary and necessary expense under section 23 (a) of the Internal Revenue Code, and they were not for permanent improvements within section 24 (a) (2).
*937 The Commissioner has determined deficiencies in income tax for the years 1947, 1948, and 1949, as follows:
| Docket No. | Year | Amount |
| 32482 | 1947 | $ 4,529.69 |
| 32483 | 1948 | 800.98 |
| 32483 | 1949 | 795.90 |
The question to be decided is whether the cost of grading the land of farms into earthen terraces to combat soil erosion is deductible under section 23 (a) of the Internal Revenue Code. The respondent disallowed deduction under section 24 (a) (2).
The petitioners filed their returns with the collector for the district of Kansas.
FINDINGS OF FACT.
The facts which have been stipulated are found as facts. The stipulation is incorporated herein by reference.
The petitioners reside in Topeka, Kansas. J. H. Collingwood is referred to hereinafter as the petitioner because the issue to be decided relates solely to his business.
*76 The petitioner owns five farms in Kansas which he rents for the production of income. The use of the farms for the production of income through the rental thereof constitutes a business of the petitioner. He was engaged, also, in the banking business during the taxable years.
*938 The farms in question are located in eastern Kansas; one in Jefferson County covers 320 acres; one in Osage County covers 160 acres; one in Nemaha County covers 160 acres; one in Jackson County, the Dennison farm, covers 160 acres, and another in Jackson County covers 125 acres. All of these farms were cleared and prepared for farming before 1930, and since then, at least, they have been devoted to the production of crops of wheat, or soy beans, or small grains, or sweet clovers. Since 1930, at least, all the farms have been rented to tenants who paid rent on a share-crop basis.
All of the farms are located in rolling, upland areas where the slope of the land varies from 3 to 15 per cent. They are located in a glacier-drift area which is subject to severe and rapid soil erosion. Each of the farms of petitioner, before 1947, was affected by water erosion.
There are various methods which farmers*77 use to combat soil erosion which include crop rotation, farming on contours without terracing, strip cropping, and seeding areas to grass. But a method which is highly recommended and generally followed in the vicinity of petitioner's farms is the grading of the land into earthern terraces along contour lines. This method is called "terracing." It does not involve the building of concrete or stone walls. It involves moving the earth with heavy equipment into ridges and channels which divert and slow up the running of water over the land. The object of such grading, or pushing the earth into ridges and channels is to prevent water from running downgrade at a rapid rate, from cutting gulleys into the land, and from carrying away the top soil.
The United States Department of Agriculture and the Kansas State College have recommended terracing to combat soil erosion for more than 20 years, and have issued directions and specifications for terracing farm lands. No two terracing systems will be identical, however, because the topography of the land will determine how the work is done. The United States Department of Agriculture makes benefit payments to farmers, upon application, to*78 help defray the cost of terracing, provided the work is done according to approved standards and specifications. The average benefit payment is about 40 per cent of the cost of terracing subject to limitations which depend upon location, the number of farms owned, and the number of farms terraced by a recipient.
In 1940, petitioner terraced one of his farms but by 1947, for various reasons, the terraces were obliterated.
In 1947, the petitioner began a program of terracing all of the five farms in question for the purpose of preventing the further loss of top soil from water erosion. The plan which he adopted involved an intensive amount of work which was done on all or most of the five farms at about the same time. The work was continued in 1948 *939 and 1949. The cost of the terracing work consisted of a charge of from 15 to 18 cents per cubic yard of earth moved by heavy equipment such as plows, bulldozers, graders, and whirlwind terracers. Except for the building of one concrete spillway which was not of any significance and which sank into the ground as a result of water erosion within 1 year, no stone, tile, or concrete was used in terracing the farms. Only earth *79 was involved in making the terraces. The cost of pushing and grading earth on the five farms into terraces was as follows:
| 1947 | $ 10,515.41 |
| 1948 | 3,378.46 |
| 1949 | 2,932.00 |
In all of the terracing work in the taxable years, the petitioner followed the standards and specifications approved by the United States Department of Agriculture and by the Kansas State College, but he did not apply for any benefit payments. Petitioner paid all of the cost of the terracing work in the amounts set forth above. No part of the expenditures in the amounts set forth above was for the clearing of land or for what is generally done in preparing raw land for farming purposes.
The terracing which was done in 1947, 1948, and 1949 on each of the farms was done, in general, in the following way: By the use of surveyor's instruments the contours of the land were determined and contour lines were laid out going completely around a hill. The contour lines were laid out from the highest to the lowest points of the rolling land in a very roughly parallel manner depending upon slopes and contours. Suitable outlets for run-off water were selected such as a grass waterway or pasture where water could run*80 off gradually without cutting gulleys in the land and without washing away the top soil. By the use of plows, bulldozers, graders, and whirlwind terracers, each terrace of earth was made, beginning at the highest point of the slope of the land. Each terrace was continuous in its course around a hill or contour line. A "terrace" consisted of an earthen hump or ridge, one side of which sloped out to a curved channel having for its "back" or opposite side, an earthen ridge. Each terrace had a broad base of from 18 to 30 feet wide, and it was about 18 inches high. The top of the ridge was flattened. The earth was pushed aside into ridges leaving channels. The width of ridges and channels, and the space between terraces varied according to the slope of the land and the estimate of the amount of water from rainfall to be diverted through the channels. Grading the channel was necessary to provide for a proper run-off of water. The ridge was merely a mound of earth which was pushed up, plowed up, or put up with a terracing machine. The ridges and channels were made to keep water from running straight down a hillside, to slow up the *940 run-off of the water, and to increase*81 the absorption of water into the land. Where the slope of the land was steep, the terraces were built closer to each other but with capacities sufficiently large to divert the fast run-off of water.
The farming of terraced land is more difficult and takes more time than farming on straight lines. Tilling is more difficult along terraces. Farmers resort to terraced farming out of necessity and because terracing is a means of saving the top soil from being washed away by water.
After the terraces were made on petitioner's farms, farming operations were carried on by the tenants in conformity with the terraced contours. The tops of the ridges were completely tilled and cultivated. The terraced ridges were plowed, worked with a disc and harrow, and with a soil surgeon. In the course of a year, five or six sets of farm implements were pulled over the terraced ridges in the process of farming them to wheat.
Terraces stop erosion by water for as long as they do not break but when breaks in terrace ridges occur, water erosion takes place. Therefore, farming operations cannot be carried on in a straight line across terraces, and care must be taken in farming with the terrace not to *82 break it. Where breaks in terraces occur, which are not long, the breaks are filled in with earth. But if a long length of terrace breaks, the entire terrace must be rebuilt.
Earthen terraces deteriorate. The five chief factors which contribute to the deterioration of terraces are rainfall, which tends to wash terraces down; gophers and muskrats, which bore through the bottoms of terraces; ice which jams and blocks channels; depositing of silt on the upper sides of and within channels; and the working of farm implements over the ridges in the cultivation of the land which flattens the tops of the ridges. A sudden and heavy rain can wash out a terrace in as short time as 48 hours. Every time rain falls, silt is deposited. The depositing of silt, or "silting in," may happen gradually or rapidly. Silt deposits may fill in channels between ridges. The silt deposits then perform the function of dams. If the silt deposit fills in a channel, water runs over the top of the channel rather than through it, and water erosion is resumed, which causes gulleys and the washing away of terraces below. Variations in the weather and in rainfall make uncertain the extent and the frequency of*83 rebuilding or repairing terraces. The usefulness of terraces is affected by the weather, the force of erosion, the type of outlets for water, and the care taken in farming and in maintenance work.
When farm land is terraced, the work can be done gradually over several years; it can be done in between crops so that a crop will not be lost. One or two terraces can be built each year between the harvesting and planting of crops.
*941 The petitioner's five farms were not more valuable after the terracing work was done. The terracing did not increase the fertility of the soil; it did not reduce the need for the use of fertilizers, or the cost of fertilizers; it did not add to the productivity of the land or make it suitable for new uses. The terracing of petitioner's five farms was done for the purpose of saving the top soil from being washed away, to reduce water erosion, and to retard or stop the deterioration of the farm lands. The terracing of the farms served these purposes and served to maintain them in an ordinarily efficient condition for farming, and to preserve the normal productivity of the soil.
The terracing of the five farms did not constitute a permanent improvement, *84 and the cost of the work was not a capital expenditure but was an ordinary and necessary expense.
OPINION.
The respondent disallowed deduction of the cost of farm terracing in each of the taxable years upon his determination that the expense comes within section 24 (a) (2), Internal Revenue Code. 1 The respondent contends that the farm terracing work in question constituted a permanent improvement. He does not, under his theory, agree that the cost of the farm terracing can be recovered through depreciation.
The petitioner contends that the terracing work was, essentially, for maintenance and conservation of the farms. He denies that the farm terracing work constituted a permanent improvement or betterment within section*85 24 (a) (2).
It is not disputed that the farms in question were held for the production of income.
Although the question here is concerned with the farm lands, the posture of the question by the parties is the same as in the many cases where the cost of work on industrial property has been considered. Respondent refers to Regulations 111, section 29.24-2, and to the principles set forth in Illinois Merchants Trust Co., 4 B. T. A. 103, 106.
Whether an expenditure on a piece of property is one which may properly be "expensed" rather than capitalized is often difficult to determine. In the now leading case, Illinois Merchants Trust Co., supra, several tests were suggested, which are quoted below, and it was emphasized that "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 *942 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. * * *
This Court, in applying the above principles, has held that expenditures on property which have been rather large in amount, which were for the purpose of overcoming and correcting a physical fault in land such as "cavitations in the overburden" which caused cave-ins of the land and structures above the cave-ins, American Bemberg Corporation, 10 T. C. 361, affirmed per curiam 177 F.2d 200">177 F. 2d 200; and the seepage of water and other liquids through the earth into buildings, Midland Empire Packing Co., 14 T.C. 635">14 T. C. 635; Farmers Creamery Co. of Fredericksburg, Va., 14 T. C. 879, were essentially in the*87 nature of repairs rather than improvement or replacement. We conclude that the expenditure in question here, for moving earth into ridges and channels to overcome the condition of water erosion which developed in petitioner's five farms after they had been in cultivation for a long time was no more capital in nature than were the expenses in the American Bemberg, Midland Empire, and Farmers Creamery cases, supra.
The facts have been set forth at length and need not be restated. First, it is noted that the expense in question was not for the development of the farm lands "prior to the time when the productive state" was reached, and, therefore, was not a development expense which must be regarded as investment of capital under section 29.23 (a)-11 of Regulations 111. The terracing of the farms was not done for the purpose of converting them to some new use, or to any use which was different from the use during the years prior to 1947, to which the farms had been devoted. Nothing new was added to the farm lands of a structural nature; the erosion control terraces, consisting of ridges and channels, were simply the earth in place on the farms which was plowed, graded, *88 and pushed to follow the natural contour lines of the farms which had long been farmed to wheat, grains, soy beans, and clovers. The same crops were raised on the farms after the terracing work was done as before. Nothing was added to the soil. No new farming areas were developed; and no clearing of the land or work to prepare land for cultivation was done. The terracing work did not change the fertility of the soil, or make farming operations easier. The terracing did not increase the value of the land or its products.
The evidence shows that the terracing work was done for the purpose of preventing or checking further gullying of the land by water *943 erosion, and further loss of top soil from the rapid run-off of water downgrade. The evidence as a whole establishes, in our opinion, that the terracing of the five farms was done in the taxable years for the purpose of maintaining them in an ordinarily efficient condition for the carrying on of the kind of farming which had been followed before the terracing was done; and was for the purpose of preserving the normal productivity of the farm lands. Expenditures for such purposes are not capital in their nature.
The "fault" *89 in the land to overcome which the expenditures for terracing were made was water erosion. 2 Such erosion occurs with unpredictable variations in intensity depending upon weather conditions. Since petitioner's farms were subject to water erosion, the terracing work was, in itself, subject to the variations in weather conditions, and is not permanent. Petitioner called two witnesses who are experts in the work of controlling water erosion, men who have had 20 to 30 years' experience in the work. Respondent did not call any witnesses, and he did not offer any countervailing evidence. The evidence as a whole, including the opinions of the expert witnesses, establishes that the expenditures in question were not for improvements, replacements, or permanent improvements. 3 On the other hand, the evidence shows that the expenditures were in the nature of repairing land which was eroded so as to maintain it in a way which would be as nearly free from the defects caused by erosion as possible. We conclude, therefore, that the cost of terracing was in the nature of repair and maintenance expense, and hold that it is deductible as an ordinary and necessary business expense under section*90 23 (a) of the Code.
With respect to the amount of the expense in each of the taxable years, and in 1947, in particular, we observe that four farms covering from 125 to 160 acres, and one farm*91 covering 320 acres were involved in each year. Petitioner did not present a breakdown of the cost per farm of the work in each year, but we understand that the cost per farm was in proportion to the acreage of each farm. So viewed, the expense per farm in each year was not so large as to be inconsistent with a repair and maintenance expense in view of the circumstances; compare American Bemberg and Midland Empire, supra.
*944 We have considered all of the cases cited by the respondent, many of which were decided by this Court in unreported memorandum reports. Respondent has not cited any decision which squarely supports his view.
Decisions will be entered for petitioners.
Footnotes
1. 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, * * *.↩
2. There are two main types of water erosion, "sheet erosion" and "gully erosion." Sheet erosion is defined as "the removal of surface soil in fairly uniform layers or sheets," while gully erosion is "the removal of soil at points of excessive water concentration where relatively deep ditches are cut into the surface." The intercepting channels of a terracing system "break long slopes into short segments and thereby provide low-velocity surface drainage, which materially reduces the amount of top soil that can be carried down the slope or from the field by surface run-off." C. L. Hamilton, "Terracing For Soil and Water Conservation," United States Department of Agriculture; Farmers Bulletin 1789, Rev. April, 1943, p. 3.↩
3. One witness observed: "You can move a pile of dirt but you can't keep the weather from moving it again."↩