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by REE and TNE, made in lieu of rent payments otherwise payable
under the lease agreements. Petitioners have not explained why
REE and TNE would need to credit Blockbuster's rent with the
costs incurred for the carpeting if such costs were not incurred
as improvements to REE's and TNE's properties. Petitioners'
scenario would result in a double benefit to Blockbuster for the
costs incurred; ownership of the carpeting plus reductions in
rent.
We hold that REE and TNE must include in gross income the
costs of the carpeting incurred by Blockbuster and credited
against its rents payable to REE and TNE.
With regard to REE's claimed deduction for the cost of the
carpeting as a repairs expense, section 263 provides that no
deduction shall be allowed for capital expenditures. LaPoint v.
Commissioner, 94 T.C. 733, 735 (1990). Capital expenditures
include amounts paid or incurred which add to the value or
substantially prolong the useful life of the property. Sec.
1.263(a)-1(b), Income Tax Regs. In contrast, amounts paid or
incurred for incidental repairs or maintenance are currently
deductible if they neither materially add to the value of the
property nor appreciably prolong the property's useful life.
Sec. 1.162-4, Income Tax Regs. Since each case turns on its
special facts, the distinctions between current expenses and
capital expenditures are those of degree and not of kind.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 86 (1992). The
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