(dissenting).
With deference to the majority of the Court, I think the judgment of the trial court should be reversed. There is nothing in either the complaint or the evidence to support the proposition that the expenditures are deductible under Section 23(a) (1) (deduction of ordinary and necessary expenses paid or incurred in carrying on a trade or business). The complaint refers to them as being expended “for the production and/or conservation of taxable income during such year.” This was clearly an effort to *204classify them as deductible under Section 23(a) (2) (non-business expenses). In order for them to come within that section they must have been paid or incurred “for the production or collection of income, or for the management, conservation or maintenance of property held for the production of income.” Although the taxpayers did not, in their complaint, contend that they were for the management, conservation or maintenance of property held for the production of income, this is their principal contention before us. While, under the Federal rules, we can treat the case as though the plaintiffs made such allegation if the record supports it, it is nevertheless significant that the parties themselves did not contend that these expenditures were for the conservation or maintenance of income-producing property. They proceeded on the theory that the expenditures were for the production and/or conservation of taxable income during the tax year in question, a contention which is clearly unsupported by the record.
While the exact line of demarcation between expenditures that are capital in nature and those that are of the character of current expenses is not entirely clear, the underlying principles are well understood. Expenditures that create or add to assets in a permanent rather than transitory way, are generally considered capital expenditures. Those that are made as a necessary incident to the current production of income or keeping in repair of a physical property, are in the nature of expenses and are thus deductible. If an expenditure does not fall readily into either of these classes it must be viewed in the light of the purpose for which the statutes have drawn a distinction between them.
In another opinion just decided by this Court we have said:
“The language of the statute, together with the legislative history of the section, make it clear that Section 23(a) (2) was added by the 1942 Act to remedy the inequitable situation, which arose in Higgins v. Commissioner, 312 U.S. 212, 61 S.Ct. 475, 85 L.Ed. 783, of an individual being taxed on investment income but being denied the right to deduct the cost of producing that income. Prior to the amendment such cost could be deducted only if the expenditure even though admittedly made in connection with the realization of current income, was made in ‘carrying on a trade or business.’ ” United States of America v. Mellinger, 5 Cir., 228 F.2d 688, 692.
There is obviously nothing in the expenditures made here of the kind contemplated by Congress in enacting Section 23(a) (2).
The parties themselves deal with the newly created unitized holdings as “units.” These units are newly created by the very legal services for which the expenditures were made. Such expenditures, it seems to me, are more nearly like payments for legal or accounting services in a merger of two or more corporations. Such an expenditure would undoubtedly be capitalized and would not be deductible as a current expense.
I think that on logic and by virtue of prior pronouncements of this Court, the underlying principle compels a finding in favor of the defendant below. See Morgan Jones’ Estate v. Commissioner, 5 Cir., 127 F.2d 231; see also Frishkorn Real Estate Co. v. C. I. R., 15 B.T.A. 463.
I think, therefore, the judgment should be reversed.