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that it is also entitled to ordinary and necessary business
deductions for the costs of removing the asbestos-containing
materials from the Douglas Street building for tax years 1987 and
1988 in the respective amounts of $175,095 and $863,764 (which
amounts, petitioner claims, were inadvertently omitted from its
1987 and 1988 returns).
K. Notice of Deficiency
In the notice of deficiency, respondent disallowed
petitioner's $902,206 ordinary and necessary deduction for
asbestos-removal expenditures.
Discussion
At issue is whether petitioner's costs of removing the
asbestos-containing materials are currently deductible pursuant to
section 162 or must be capitalized pursuant to section 263 or as
part of a general plan of rehabilitation.
L. Capital Expenditures vs. Current Deductions
Section 263 requires taxpayers to capitalize costs incurred
for permanent improvements, betterments, or restorations to
property. In general, these costs include expenditures that add to
the value or substantially prolong the life of the property or
adapt such property to a new or different use. Sec. 1.263(a)-1(b),
Income Tax Regs. In contrast, section 162 permits taxpayers to
currently deduct the costs of ordinary and necessary expenses
(including incidental repairs) that neither materially add to the
value of property nor appreciably prolong its life but keep the
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