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Commissioner, 40 F.2d 372 (8th Cir. 1930), affg. on other grounds
8 B.T.A. 225 (1927); Southern Natural Gas Co. v. United States,
188 Ct. Cl. 302, 412 F.2d 1222, 1264-69 (1969).28
Having rejected petitioners’ first argument as to the
salaries and benefits, we now turn to petitioners’ second
argument that the salaries and benefits are outside the reach of
section 263 because, they contend, those items are not described
in that section. Petitioners make three assertions in support of
this argument. First, they assert that section 263(a) applies
only when an expenditure creates or adds value to a separate and
distinct capital asset29 and that ACC’s payment of the salaries
and benefits neither created nor added value to a capital asset.
According to petitioners, an expenditure is subject to section
263(a) only if it (1) is incurred to increase the value of
28 In Commissioner v. Idaho Power Co., 418 U.S. 1 (1974),
the Supreme Court held that the taxpayer must capitalize the
portion of depreciation on transportation equipment allocable to
part-time use in constructing improvements and other capital
facilities for the taxpayer. In Great N. Ry. v. Commissioner, 40
F.2d 372 (8th Cir. 1930), affg. on other grounds 8 B.T.A. 225
(1927), the Court of Appeals for the Eighth Circuit held that a
railway had to capitalize the cost of operating its regular
trains to the extent it was attributable to the transportation of
the railway’s workmen and materials to construction sites. In
Southern Natural Gas Co. v. United States, 188 Ct. Cl. 302, 412
F.2d 1222, 1264-69 (1969), the Court of Claims held that
depreciation on automotive equipment used primarily for operating
and maintaining a pipeline system, but occasionally used in
construction operations, had to be capitalized to the extent it
was attributable to the construction.
29 The amici for FNMA also advance this argument.
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