Mt. Morris Drive-In Theatre Co. v. Commissioner
United States Tax Court
25 T.C. 272 (1955)
Mt. Morris Drive-In Theatre Co. (plaintiff) acquired its property and built its theater in 1947, at which point the runoff problem that would later harm an adjacent landowner was already foreseeable and correctable. In 1950, to settle that adjacent landowner's lawsuit, the company built a drainage system, and it claimed depreciation deductions on the system as an ordinary and necessary business expense to settle the litigation, or alternatively as a deductible business loss; the Commissioner (defendant) disallowed the deduction, and the company petitioned the Tax Court for redetermination.
Whether, in determining if construction expenses are deductible business expenses or non-deductible capital expenses, the decisive test is the character of the transaction giving rise to the expenses.