1957 U.S. Tax Ct. LEXIS 91">*91
During the taxable year ended June 30, 1952, two of petitioner's plants were destroyed by fire. Petitioner carried fire insurance but in order to present its claims for insurance it employed a firm of architects to recreate plans and specifications and a contractor to estimate the replacement cost of the destroyed plants. As a result of such claims petitioner recovered insurance proceeds exceeding the adjusted basis of the plants. It placed the proceeds in a "replacement" account and used such proceeds in replacing the destroyed property, the cost of which exceeded the proceeds, and in accordance with
28 T.C. 1169">*1169 OPINION.
Respondent determined a deficiency in income tax for the taxable year ended June 30, 1952, in the amount of $ 2,932.54. 1957 U.S. Tax Ct. LEXIS 91">*93 Only that portion of the deficiency attributable to the disallowance as 28 T.C. 1169">*1170 expense deductions of certain professional fees paid to a firm of architects and a contractor in the total amount of $ 3,452 is contested.
The parties have submitted this proceeding upon a stipulation of facts pursuant to Rule 30 of the Court's Rules of Practice. A summary of this stipulation is set forth below.
Petitioner is a corporation organized and existing under the laws of the State of Georgia with its principal place of business in Macon, Georgia. The return for the period here involved was filed with the director of internal revenue at Atlanta, Georgia.
During the taxable year here involved, petitioner was engaged in the business of the manufacture and sale of commercial fertilizer. In August 1951, its dry mix and acidulating plants were destroyed by fire. At the time of the fire, petitioner held hazard insurance policies in force and effect which insured petitioner against such fire loss. Under the contracts of insurance, claims arose in behalf of the petitioner against the insurance carriers.
The plants which were destroyed by fire in 1951 were constructed in 1914. At various times between1957 U.S. Tax Ct. LEXIS 91">*94 1914 and 1951 construction changes had been made in the plants but there was not available an accurate record of such changes. Some parts of the plans and specifications for the plants which were destroyed were available after the fire but such plans and specifications were not complete.
In order to present its claims to the insurance companies, the petitioner employed a firm of architects to recreate plans and specifications of the destroyed plants. Petitioner also employed a contractor skilled in estimating cost to estimate the replacement cost of the destroyed plants in accordance with the recreated plans and specifications prepared by the architects. From the recreated plans and specifications prepared by the architects and the estimate prepared by the contractor, petitioner reconstructed the replacement cost of the destroyed plants at the then current market price. The replacement cost of the destroyed plants thus determined served as a basis for the claims of the petitioner against the insurance carriers.
As a result of the claims made to the insurance companies, the petitioner received from the companies the amount of $ 275,440.41 for the damage to the buildings, machinery, 1957 U.S. Tax Ct. LEXIS 91">*95 and equipment of the petitioner. The insurance proceeds received by petitioner exceeded the adjusted basis of the plants, machinery, and equipment destroyed in the fire. In December 1951 and January 1952 the funds received by petitioner from the insurance companies in the amount of $ 275,440.41 were deposited in a special account at the First National Bank and Trust Company, Macon, Georgia, and designated "Building, Machinery and Equipment Replacement Account." The funds in this account were used in replacing the destroyed plants, machinery, and 28 T.C. 1169">*1171 equipment. The cost of replacing the destroyed plants, machinery, and equipment exceeded $ 275,440.41 and, in accordance with
The plans and specifications prepared by the architects and the estimate prepared by the contractor were used by the petitioner only in connection with the determination of the amount of petitioner's claims against the insurance carriers.
The building constructed by the petitioner to replace1957 U.S. Tax Ct. LEXIS 91">*96 the destroyed plants was of a modern design for which another set of plans and specifications was prepared. The charges for this set of plans and specifications were capitalized as a part of the cost of the new buildings.
On December 28, 1951, petitioner paid the architects for the recreated plans and specifications of the destroyed plants the sum of $ 3,052. This payment was made from the general funds of petitioner and was not made from the insurance proceeds deposited in the special account. This payment to the architects has been disallowed as a deduction by respondent and the disallowance is contested by petitioner.
On January 3, 1952, petitioner paid the contractor for preparing the estimate of the replacement cost of the destroyed plants the sum of $ 400. Such payment as aforesaid was not made out of the insurance proceeds. This payment to the contractor has been disallowed as a deduction by respondent and the disallowance is contested by petitioner.
The sole issue in this case is whether the expenditures made by petitioner during the taxable year ended June 30, 1952, for the services of a firm of architects and a contractor in the total amount of $ 3,452 are nondeductible1957 U.S. Tax Ct. LEXIS 91">*97 pursuant to the provisions of
(a) General Rule. -- In computing net income no deduction shall in any case be allowed in respect of -- * * * * (5) Any amount otherwise allowable as a deduction which is allocable to one or more classes of income * * * wholly exempt from the taxes imposed by this chapter * * *
We assume that the amounts in question are "otherwise allowable as a deduction" as that phrase is used in
For the purposes of this opinion, we may assume without deciding that the expenditures of $ 3,452 are allocable to the proceeds of $ 275,440.41. This assumption brings us to the principal question in this case as to whether the proceeds are "income * * * wholly exempt from the taxes imposed by this chapter" as that phrase is used in
1957 U.S. Tax Ct. LEXIS 91">*100 Respondent contends that because petitioner was not required, under
We do not agree with this contention. The insurance proceeds did not become "income * * * wholly exempt" by reason of petitioner's 28 T.C. 1169">*1173 election under
We hold, therefore, that the respondent erred in applying
Because of the other uncontested adjustments made in the deficiency notice,
1. All further references herein to section numbers are of the Internal Revenue Code of 1939.↩
2.
(f) Involuntary Conversion. -- If property (as a result of its destruction in whole or in part * * *) is * * * involuntarily converted -- * * * * (2) * * * For the purposes of this paragraph and paragraph (3), the term "disposition of the converted property" means the destruction * * * of the converted property * * * (3) Conversion into money where disposition occurred after 1950. -- Into money * * * and the disposition of the converted property (as defined in paragraph (2)) occurred after December 31, 1950, the gain (if any) shall be recognized except to the extent hereinafter provided in this paragraph: (A) Nonrecognition of Gain. -- If the taxpayer * * * purchases other property similar or related in service or use to the property so converted * * * at the election of the taxpayer the gain shall be recognized only to the extent that the amount realized upon such conversion * * * exceeds the cost of such other property * * *↩
3.
(a) Basis (Unadjusted) of Property. -- The basis of property shall be the cost of such property; except that -- * * * * (9) Involuntary conversion. -- * * * In the case of property purchased by the taxpayer which resulted, under the provisions of
