Norwest Corp. v. Comm'r

Rule of Law:

Expenditures that might be deductible as repairs if made in isolation must be capitalized when they are made as part of a general plan of rehabilitation or improvement to a property.

Facts:

• Norwest Corp.'s subsidiary owned a commercial office building constructed in 1969 with asbestos-containing fireproofing, as was common at the time.
• In 1986, after 15 years without major updates, Norwest decided to undertake a complete remodeling of the building to accommodate more personnel.
• Environmental testing confirmed the presence of asbestos, which would inevitably be disturbed by the extensive remodeling work.
• Norwest decided to remove the asbestos-containing materials in coordination with the remodeling because it was a practical necessity and more cost-effective than performing the two projects separately.
• The asbestos fireproofing was removed by a specialized contractor and replaced with a new, asbestos-free fireproofing material installed by the general contractor's subcontractors.
• The asbestos removal and the remodeling were performed in coordinated phases, where the asbestos was cleared from a specific area before the general contractor began remodeling work in that same area.

Procedural Posture:

• Norwest Corp. (petitioner) filed consolidated corporate income tax returns for the years 1987-1989.
• On its 1989 return, Norwest claimed an ordinary and necessary business expense deduction for costs associated with asbestos removal from its building.
• The Commissioner of Internal Revenue (respondent) issued a notice of deficiency, disallowing the deduction and determining that the costs must be capitalized.
• Norwest filed petitions in the U.S. Tax Court, challenging the deficiency and also claiming it was entitled to deductions for similar costs in 1987 and 1988 that it had not previously claimed.
• The consolidated cases were brought before the U.S. Tax Court for a decision on the merits.