*102 Decision will be entered for the respondent.
Over a period beginning in August of 1960 and ending in October of 1962 petitioners expended various sums for labor and materials in building the unfinished attic in their home into a family recreation room. In 1963 they were awarded a prize of $ 10,867 in cash and merchandise in respect of the recreation room in the Better Homes and Gardens magazine's "Home Improvement Contest" announced in the January 1962 issue of the magazine. They reported the $ 10,867 of prize money and merchandise as income in their 1963 return and deducted $ 9,816.33 claimed as the cost of producing the room. The deduction so claimed was disallowed by the respondent in his determination of deficiency herein. Held, That the expenditures made in constructing the recreation room constituted amounts paid for permanent or continuing improvements or betterments within the meaning of section 263 of the Internal Revenue Code in respect of which the said section provides that no deduction shall be allowed.
*567 Respondent determined a deficiency in income tax against petitioners as follows:
| Addition to tax | ||
| Year | Deficiency | (Sec. 6651(a)) |
| 1963 | $ 2,390.54 | $ 506.94 |
The question for decision is whether petitioners, who won prizes of $ 10,867 in a home improvement contest, are entitled to deduct the costs incurred in building the unfinished attic in their home into a family recreation room, which room in the taxable year became the prize-winning entry in the contest.
*568 *105 FINDINGS OF FACT
Some facts and some evidence have been stipulated by the parties and the facts so stipulated are found as stipulated.
Monroe J. and Shirley B. Paxman are husband and wife and reside at 135 East Second North, Provo, Utah. They used the cash method of accounting in reporting their income, and filed their Federal income tax return for 1963 with the district director of internal revenue at Salt Lake City, Utah.
Monroe J. Paxman is a lawyer. During the years 1960 through 1963 he was employed by the State of Utah as a juvenile judge. He also engaged in the private practice of law.
Petitioners purchased and moved into their present home in 1952. It had been built in 1893 and was Victorian in architectural style. It was run down and needed renovation.
At the time of moving into their newly purchased home the petitioners had five children. In purchasing the home they regarded the unfinished attic as the space best suited for a recreation room and began evolving plans to that end. In August of 1960 they began the construction of the attic into a recreation room. By that time they had seven children, ages 17, 15, 14, 12, 8, 6, and 4, and needed more bedroom space, play*106 space, and storage space.
The most prominent feature of the completed room was an old soda fountain with accompanying furnishings and fixtures which were installed in the manner of a Victorian ice-cream parlor. This idea had suggested itself when petitioners found an old soda fountain with all the pumps intact for sale for $ 10. Also prominent was a balcony constructed in juxtaposition with the soda fountain in the main part of the room where the ceiling was high. This balcony provided play space for the smaller children. 1 Access was by a built-in ladder, but in addition to the ladder there was a second facility for descent in the form of a brass pole in the manner of that in a firehouse.
There were two dormer window areas. The smaller, with its low peak, was fitted out with a long pad and cushions at the window for lounging, reading, and the like. In the larger dormer area there was*107 a built-in couch along one side. The accent was on musical instruments as for instance an old-style gramophone with its morning-glory horn and an old-style home organ.
A goodly part of the fixtures and furnishings had been collected by petitioners over a number of years, and were already on hand when construction was started. The organ had been given to Shirley Paxman by an aunt. The decorative windows to the back and above the soda *569 fountain were from a saloon in Montana and had been found in a secondhand shop. The chandelier, which was hung over the soda fountain, had been obtained from relatives approximately 15 years prior to its use in the recreation room.
In the planning and decorating of the recreation room petitioners were assisted by an interior decorator. Specifically, he assisted in the selection of the paint and the floor materials and with the designing of the grillwork around the soda fountain.
In its January 1962 issue Better Homes and Gardens Magazine announced a "1962 Home Improvement Contest." The contest was divided into four categories -- 1. Exteriors, 2. Interiors, 3. Additions (new enclosed space attached to house), 4. Kitchen-utility area -- with*108 separate prizes to winners in each category. In addition there were three grand prizes, the first being for $ 10,000, the second for $ 4,100, and the third for $ 2,100.
It was provided in the official contest rules that "Judging will be done on the basis of originality of ideas, soundness of plan and design, wise selection and use of materials, usefulness and satisfaction to the family or individual involved." (Emphasis supplied.)
The period of the contest was announced as beginning January 1, 1962, and ending December 31, 1962. It was specified that work on an entered project "must be completed, though not necessarily begun, during that time." It was required that the final entry form be postmarked not later than midnight of December 31, 1962, and received by Better Homes and Gardens by January 15, 1963. The final entry form was to include a description of the project, "the reasons behind it," and why the "home needed improvement." Another requisite was that "before" and "after" photographs of the project involved be submitted.
The work on the recreation room was completed in October of 1962 and petitioners' entry form was filed within the time specified under the rules of*109 the contest. The work of preparing the form was, in the main, done by Monroe Paxman and included the description of the project with various drawings of the room and plans. The drawings were designed to show the project in various aspects both "before" and "after" the work was started and completed. As for "the reasons behind" the project and why "the home needed improvement," it was stated that, "With seven children needing more bedroom space, play space, and storage space, the large unfinished high-peaked attic of our Victorian house seemed to provide the ideal space for expansion."
On the entry form cost of materials, equipment furnished, plans and so forth was shown as $ 2,345; cost of hired labor as $ 1,065; cost of *570 labor provided by family and friends estimated at rates per local labor as $ 565; or a total of $ 3,975.
On some undisclosed date in 1963 the grand prize of $ 10,000 was awarded to petitioners' entry of their recreation room. In addition to the $ 10,000 in cash, petitioners also received merchandise valued at $ 867. 2
*110 After petitioners had been determined to be the grand prize winners, a representative of Better Homes and Gardens went to Provo and he and the magazine's photographers spent 3 days with the Paxmans.
The October 1963 issue of the magazine carried a front-cover picture of the soda fountain with three of the daughters and one son in the guise of customers and with Paxman and one son doing the serving. A double spread of pictures and an article describing the grand prize-winning recreation room appeared on pages 60 and 61. Beneath the picture of the interior as it appeared on page 61 was the legend "Decorator: Blair Bowen." Petitioners furnished the information and material for the article. 3
*111 Under the rules of the contest the entry material submitted by petitioners became the exclusive property of Better Homes and Gardens magazine. The magazine also had exclusive rights to the pictures taken by its photographers and procured a signed release from petitioners to that effect. It acquired no property interest whatsoever in petitioners' recreation room and similarly it had no property interest in pictures subsequently taken of the room.
In 1960 the Paxman family had won the title of Utah's "All-American Family" and a trip to Florida to compete in the "All-American Family Search." In that competition they won third place and were awarded merchandise prizes. Their two eldest daughters, each in a separate year, 4 won merchandise prizes as first place winners in *571 Seventeen magazine's "Teen Hostess Contest" by submitting party plans, including theme, decorations, games, and menu.
*112 For quite a number of years petitioners have been active as game and party consultants. They have written and had published several books on recreation, games, parties, and family activities. Two such books, one entitled "Family Night of Fun" and the other "The Family Book of Fun," have each had two editions. The petitioners have made trips into quite a number of States as lecturers on the holding of family parties and family recreation. They have written magazine articles involving the same subject matter. They first began receiving remuneration from such activities in 1949.
Since its construction, the recreation room in the attic of petitioners' home has supplied some of the material or ideas used in connection with lectures which petitioners have made for pay and with respect to promotional work they have done relating to their books and lectures.
From such activities and for the taxable year 1963 petitioners reported income in the amount of $ 733.60 and expenses of $ 786.35, resulting in a net loss of $ 52.75. As it appeared on their 1963 return, this amount was stated as $ 53.75. For the year 1964 they reported income of $ 1,069.38 from such activities and a net income*113 of $ 5.33.
During the years 1959 through 1962 Paxman served as a member of the Young Men's Mutual Improvement Committee of the Church of Jesus Christ of Latter-day Saints and in that capacity wrote a number of manuals and formulated recreation activities for the organization on a worldwide basis.
The petitioners on their 1963 income tax return reported as income received $ 10,867 in prizes and deducted from this amount the sum of $ 9,816.33 described as "Total Costs of Home Improvement Project." Of the $ 9,816.33 deducted, $ 6,568.63 was listed as "materials, net" and $ 3,247.70 as "Labor." In his determination of deficiency the respondent disallowed the deduction so claimed. He allowed $ 60 as "contest entry expenses such as costs of pictures, etc."
He further determined that to the extent of 25 percent petitioners have used the recreation room in their income-producing endeavors as authors of books and articles and as lecturers on recreation, games and family activities, and based on a 20-year useful life has allowed a depreciation deduction computed on a basis of $ 2,454.08, or 25 percent of the claimed cost of $ 9,816.33, for building the recreation room.
The recreation room *114 herein constituted an improvement to the family home and when completed became one of its component parts, and as in the case of the home it had a useful life extending beyond the year of its completion. The purpose for its construction and the primary *572 and major use to which it has been put is as a family room and recreation center for the Paxmans and their children and friends. Any use of the room by petitioners in connection with their income-producing activities has been secondary and minor to the primary purpose and use, and in no respect has exceeded 25 percent of the total use of the room.
OPINION
The only issue raised by the pleadings is the deductibility of expenditures in the claimed amount of $ 9,816.33 for materials and labor in the construction by the petitioners of the unfinished attic of their home into a family recreation room. The petitioners concede that by reason of their entry into the "Home Improvement Contest" in pursuit of a prize, the $ 10,867 of prize money and merchandise received by them was gross income. See in that connection section 74 of the Internal Revenue Code of 1954. 5
*115 It is well settled that in computing taxable income, deductions are a matter of legislative grace and to be allowed must fall within some provision or provisions of the Code providing therefor and obviously must not fall within sections 261 through 274 in which Congress has expressly declared as to the items specified therein "no deduction shall in any case be allowed."
The petitioners on brief have advanced a number of theories and arguments in support of their contention that the cost for producing the recreation room is deductible for 1963, the year in which the prize in money and merchandise was received. One such theory is that since the prize received in respect of the recreation room in the "Home Improvement Contest" was income "it follows logically that the effort that was expended to produce the prize-winning entry" was a trade or business; that the fact that substantial income is received in 1 year through a prize accelerates the time in which allowance should be made for the cost of producing the prize-winning entry; and that petitioners' costs for labor and materials in producing the recreation room thus qualify as ordinary and necessary expenses *573 in carrying*116 on a trade or business under section 162 of the Code. 6
Petitioners also suggest that for many years they have "participated in a special occupation art, or trade consisting of lecturing, and writing in the field in which the prize was won, home recreation and parties." Also they argue as significant that they qualify as artists; that the recreation room produced by them was an artistic composition; and the judges awarded the prize to them on the basis of the artistic merit of the room. They further suggest that they have engaged in a "sub-trade or business of participating in contests" and as evidence refer to their participation in 1960 in the "All-American Family Search" contest in which they won the third-place prize. They also stress in that connection the winning of a prize by each of their*117 two eldest daughters in Seventeen magazine's "Teen Hostess Contest," that by the eldest in 1962 or 1963 and that by the second 3 years later. Presumably these activities are advanced as trades or businesses carried on by petitioners in which the costs of constructing the recreation room may be said to have been ordinary and necessary expenses under section 162 and thus deductible.
The other arguments are not so much as to what the statute provides but as to what petitioners feel in fairness or equity it should provide. One such argument is that since, in an art contest in which the result of winning is the sale of the prize-winning entry "the costs of materials and purchased labor would be allowable deductions," then, where as here there is no sale or disposition of the prize-winning entry in the winning of the prize but full ownership and title remain in the prize winners, "deductions for costs of production cannot equitably be postponed until the recreation room is sold with the house."
At this point it might be well to observe that in comparing or likening the situation here to a case where the prize-winning entry is sold, petitioners appear to confuse the nature of earnings *118 from the operation of a trade or business with the gain from the sale or other disposition of property, and ordinary and necessary expenses paid or incurred in the operation of a trade or business with the cost or other basis of property for determining the gain realized upon its sale or other disposition. Under the statute the ordinary and necessary expenses are a deduction from gross income in computing taxable income, whereas the cost of property sold is the basis in arriving at the amount of gain to be taken into account as gross income.
*574 At one point in their reply brief petitioners appear to admit that the Code does not provide for the deduction sought and contend that in such circumstances the Court should make a determination that would be equitable, suggesting that some theory of "accelerating depreciation" would be appropriate, namely, "allow the cost in the year in which the huge portion of the income is received."
It is the position of the respondent that the cost to petitioners for the building of their unfinished attic into a family recreation room constituted capital expenditures for the permanent improvement of their home, and under section 263 of the Code*119 is not deductible. 7 In the alternative he contends that if any part of the cost was not a capital expenditure then to that extent it was a personal or family expense in respect of which section 2628 provides that no deduction shall be allowed.
Section 1.263(a)-2 of the Income Tax Regulations lists examples of capital expenditures, which are not deductible in computing taxable income. Subsection (a) of the said regulation cites the following:
(a) The cost of acquisition, construction, or erection of buildings, machinery and equipment, furniture and fixtures, and similar property having*120 a useful life substantially beyond the taxable year.
On the facts it must be concluded that the recreation room was constructed and the cost thereof was expended for what the term implies, a recreation room for the use of petitioners and their children. It was not constructed as an entry in a contest, and its subsequent entry in the Better Homes and Gardens "Home Improvement Contest" was purely coincidental to the purpose of construction. 9
*121 However much of an artistic achievement the completed room may be said to have been, the prize as awarded was for high quality and achievement in planning and constructing of the recreation room as an item of home improvement, and, as such, its "usefulness and satisfaction" *575 to petitioners and their children. As described by petitioners to the author of the article which appeared in the October 1963 issue of Better Homes and Gardens, the room "has been worth the time and effort to create a home-centered nucleus for all the family's activities."
Not only was the recreation room an improvement to the home but when completed it became one of the home's component parts. The expenditures made in construction of the room represented an amount expended for a permanent or continuing betterment to the home, admittedly having a life beyond the taxable year, and the petitioners make no claim that these expenditures did not increase the value of the overall property.
It follows that the costs of constructing the room fall squarely within the provisions of section 263, supra, and constitute nondeductible capital expenditures. Furthermore, as to the nondeductibility of such costs, *122 the statute draws no distinction between an improvement to a property used in a trade or business and an improvement to a property used as a family home, as in this case.
The petitioners have referred us to no authority, statutory or otherwise, and we have found none, whereunder or whereby the expenditures made in producing the recreation room, which by section 263 are expressly declared not to be deductible, are, by reason of the receipt in the taxable year of a substantial amount of income in respect of the room, transformed or transmuted into ordinary and necessary expenses within the meaning of section 162 and thus deductible in computing taxable income for that year.
Similarly they cite no authority in support of their argument that the cost of producing the recreation room be allowed as a deduction for the year the home improvement prize was received under some theory of accelerated depreciation.
In the case of property used in a trade or business, or of property held for the production of income, section 167 of the Code provides for a depreciation deduction representing a reasonable allowance for the exhaustion, wear and tear of the property so used. According to the applicable*123 regulation, sec. 1.167(a)-1, the depreciation allowance provided for is the "amount which should be set aside for the taxable year in accordance with a reasonably consistent plan * * * so that the aggregate of the amounts set aside, plus salvage value, will, at the end of the estimated useful life of the depreciable property, equal the cost or other basis of the property as provided in section 167(g)" of the Code. In regulations section 1.167(a)-2, however, it is specified that "no deduction for depreciation shall be allowed * * * on a building used by the taxpayer solely as his residence, or on furniture or furnishings therein, * * *."
*576 The respondent recognizes, however, that a family residence may be used partly for business or income-producing purposes as well as for personal and family purposes and that a depreciation deduction based on the extent of the use for business or production of income is allowable. In fact, in Rev. Rul. 62-180, 2 C.B. 52">1962-2 C.B. 52, he has set up guidelines for determining the business or income-producing use and the deductions allowable for expenses and depreciation in respect of such use.
The respondent*124 in this determination of deficiency determined that in the taxable year the recreation room was used in part by petitioners in their income-producing endeavors as authors of books and magazine articles on family fun and recreation and as game and party consultants, and based on a 20-year useful life has allowed a depreciation deduction computed on a basis of $ 2,454.08, or 25 percent of the $ 9,816.33 claimed by them as the cost of constructing the room. The petitioners in their discussion on brief appear to recognize that as a recreation room the room does have a useful life comparable to that of the home. They have not taken issue with the respondent on his determination that the room did have a 20-year useful life.
It is to be noted also that the respondent made a deduction allowance in the amount of $ 60 as petitioners' cost in entering the "Home Improvement Contest" in which they won the prize money and merchandise in respect of the recreation room. Petitioners have not challenged or taken issue with this determination as to the amount of the costs actually incurred by them in entering the contest other than with respect to the deductibility of the expenditures for the construction*125 of the recreation room itself. Neither have they contended that by reason of the entry into the contest the room suffered any wear or tear, or that its continued usefulness for the 20-year useful life determined for it by the respondent was in any way impaired.
With respect to the contention that, since the Code does not specifically cover the deduction, this Court should make a determination that would be equitable, namely, allow deduction of the full amount of the cost of constructing the recreation room in the year in which the prize award was received, we do not regard it as necessary to discuss the question whether the allowance of deduction would or would not be equitable, it being our opinion that it is sufficient to say that not only is the Tax Court not a court of equity but that petitioners, in effect, are asking us to legislate changes in the statute as enacted by Congress. The proper forum for a petition or plea of that kind is Congress. The power to legislate is exclusively the power of Congress and not of this *577 Court or any other court. See Iselin v. United States, 270 U.S. 245">270 U.S. 245, at 250, where Justice Brandeis, speaking *126 for the Court, had this to say:
The statute was evidently drawn with care. Its language is plain and unambiguous. What the Government asks is not a construction of a statute, but, in effect, an enlargement of it by the court, so that what was omitted, presumably by inadvertence, may be included within its scope. To supply omissions transcends the judicial function. Compare United States v. Weitzel, 246 U.S. 533">246 U.S. 533, 543; Peoria & Pekin Union Ry. Co. v. United States, 263 U.S. 528">263 U.S. 528, 534, 535.
See also Brushaber v. Union Pacific Railroad Co., 240 U.S. 1">240 U.S. 1, 26; Hays Corporation, 40 T.C. 436">40 T.C. 436; Walter J. Baer, 6 T.C. 1195">6 T.C. 1195, 1200; and Cecil B. deMille, 31 B.T.A. 1161">31 B.T.A. 1161, 1177.
Decision will be entered for the respondent.
Footnotes
1. There is some indication of record that the space beneath the balcony was made into a separate room or closet storage space.↩
2. When asked if she had knowledge of the number of entries in the "Home Improvement Contest," it was Shirley Paxman's reply that she thought the people at Better Homes and Gardens said there were 135,000 entries. In their brief petitioners referred to their recreation room as having been selected from 128,000 entries.↩
3. The article, in part, states that "even a big house can feel the strain of seven children. The Paxmans needed a real family center to serve as a gathering spot for the nine of them -- and as a party room for the young Paxmans' friends. * * * Attic space was the best possibility * * *."
* * * *
"A remarkable playroom? You bet it is -- and both Monroe and Shirley Paxman tell us it has been worth the time and effort to create a home-centered nucleus for all the family's activities.
"They reserve one night a week for family members only; other times -- whether after school or after a dance -- the whole room is filled with friends of all ages."
It was the testimony of Shirley Paxman that the material appearing in the article is substantially correct.↩
4. It was the testimony of Paxman that the contest in which the eldest daughter participated was in 1962 or 1963, and that in which the second daughter participated was 3 years after the first.↩
5. SEC. 74. PRIZES AND AWARDS.
(a) General Rule. -- Except as provided in subsection (b) and in section 117 (relating to scholarships and fellowship grants), gross income includes amounts received as prizes and awards.
(b) Exception. -- Gross income does not include amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if --
(1) the recipient was selected without any action on his part to enter the contest or proceeding; and
(2) the recipient is not required to render substantial future services as a condition to receiving the prize or award.↩
6. SEC. 162. TRADE OR BUSINESS EXPENSES.
(a) In General. -- There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *↩
7. SEC. 263. CAPITAL EXPENDITURES.
(a) General Rule. -- No deductions shall be allowed for --
(1) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. * * *↩
8. SEC. 262. PERSONAL, LIVING, AND FAMILY EXPENSES.
Except as otherwise expressly provided for in this chapter no deduction shall be allowed for personal, living, or family expenses.↩
9. The "Home Improvement Contest" by the Better Homes and Gardens magazine was not announced until its January 1962 issue, at which time the construction of the recreation room, the planning for which began in 1952 when the home was purchased, had been under way from 14 to 15 months. Up to the time of announcement of the contest, petitioners, according to their testimony, had at the most thought they might enter the recreation room in a contest if a contest in which it would qualify should be announced. Following is a question asked Paxman on cross-examination and his answer thereto:
Q. You didn't say you expended in excess of $ 10,000 just on the basis that you might win a $ 10,000 prize?
A. No, but I think we did expect to get income from the project through a magazine article.↩