Digest Author: Alexi Calda

Midland Empire Packing Company Co. v. CIR (1950)

Petition:
Petitioner: Midlang Empire Packing Company
Respondent: CIR
Ponencia: Arundell
DOCTRINE: Whether an expenditure is a capital or is chargeable
against operating income (deductible expense) depends on the purpose
for which the expenditure was made.
FACTS:
1. Midland was a meat-packing plant in Montana which used its
basement rooms for the curing of hams and bacon and for the
storage of meat and hides.Its walls and floors were not concrete and
were not sealed against water. Whenever the water in the
Yellowstone river was high, the underground water caused increased
seepage in the plant but such really did not interfere its business.
2. In 1943, Midland found out that oil from Yale Oil Co. (neighboring
refinery) was seeping into its water wells and into water which came
through the concrete walls of the basement. Thereafter, the water will
soon drain out through the sump, leaving a thick scum of oil on the
basement floor.
3. Such oil gave off a strong odor which permeated the air of the entire
plant. The oil together with fumes therefrom also created a fire
hazard. Thus, the Federal meat inspectors advised Midland to
oilproof the basement and discontinue the use of water wells or shut
down the plant.
4. Negotiations to make Yale failed so Midland with its own efforts and
through the help of an independent contractor did the oilproofing by
adding concrete lining to the walls from the floor to a height of a bout
4 feet and concrete to the floor of the basement. The thickening of
the walls and the floor decreased the space for operation.
5. The expenditure for the oilproofing ($4,686.81) was recorded as a
deductible ordinary and necessary busineses expense at the end of
fiscal year (Nov 30 1943).
6. CIR determined that the oilproofing was not deductible either as an
ordinary and necessary expense or as a loss in 1943.

ISSUE: Whether the expenditure for the oilprooring was deductible as

an ordinary and necessary business expense or a capital improvement,
which should be recovered through depreciation charges
PROVISION: section 23(a) deductible exepnses (f) losses
RULING + RATIO: Repair deductible as an ordinary and necessary
business expense
Repair and Replacement as differentiated
o Repair
To restore to a sound state or to mend
Expenditure for the purpose of keeping the property
in an ordinarily efficient condition; does not add
value to the property nor appreciably prolong its life
Maintenance charge
o Replacement
Connotes substitution
Prolong life of the property or increase its value or
make it adapatable to a different use
Addition to capital investment
The basement was not enlarged by the oilproofing nor did not make
the basement more desirable. The expenditure did not add the to the
value of the basement nor prolong the expected life of the property.
The repairs merely served to keep the property in operating condtion
over its probable useful life.
On the claim that it was necessary but not ordinary:
o This does not mean that payment have to be habitual. It is
ordinary because the payment for such a purpose are
whether big or small are common and accepted means of
defense against attack of oil
o Protecting the basement seems a normal thing to do and it
must be a common experience to protect ones property
The purpose was not to improve, better, extend, or increase the
original plant nor to prolong its original and useful life. It was to
continue keeping the plant operating.

DISPOSITION: