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M. General Plan of Rehabilitation Doctrine
Expenses incurred as part of a plan of rehabilitation or
improvement must be capitalized even though the same expenses if
incurred separately would be deductible as ordinary and necessary.
United States v. Wehrli, 400 F.2d 686, 689 (10th Cir. 1968);
Stoeltzing v. Commissioner, 266 F.2d 374 (3d Cir. 1959), affg. T.C.
Memo. 1958-111; Jones v. Commissioner, 242 F.2d 616 (5th Cir. 1957),
affg. 24 T.C. 563 (1955); Cowell v. Commissioner, 18 B.T.A. 997
(1930). Unanticipated expenses that would be deductible as
business expenses if incurred in isolation must be capitalized when
incurred pursuant to a plan of rehabilitation. California Casket
Co. v. Commissioner, 19 T.C. 32 (1952). Whether a plan of capital
improvement exists is a factual question "based upon a realistic
appraisal of all the surrounding facts and circumstances, including,
but not limited to, the purpose, nature, extent, and value of the
work done". United States v. Wehrli, supra at 689-690.
An asset need not be completely out of service or in total
disrepair for the general plan of rehabilitation doctrine to apply.
For example, in Bank of Houston v. Commissioner, T.C. Memo. 1960-
110, the taxpayer's 50-year-old building was in "a general state of
disrepair" but still serviceable for the purposes used (before,
during, and after the work) and was in good structural condition.
The taxpayer hired a contractor to perform the renovation (which
included nonstructural repairs to flooring, electrical wiring,
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