                        T.C. Memo. 1999-265



                      UNITED STATES TAX COURT



            VANALCO, INC., A DELAWARE S CORPORATION,
              RICHARD L. SMITH, TAX MATTERS PERSON,
                         Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5955-98.               Filed August 6, 1999.



     Richard L. Mull and Ronald L. Berenstain, for petitioner.

     William A. McCarthy and Kenneth P. Dale, for respondent.



                        MEMORANDUM OPINION


     PARR, Judge:   Respondent issued two notices of final S

corporation administrative adjustment (FSAA) to the tax matters

person of Vanalco, Inc. (Vanalco), determining adjustments of

$4,325,463 and $2,930,758 to the ordinary income of Vanalco for
                                - 2 -


1992 and 1993, respectively.    After a concession,1 the issues for

decision are:    (1) Whether Vanalco may deduct or must capitalize

the costs of replacing the linings of its aluminum reduction

cells.   We hold these costs must be capitalized.   (2) Whether

Vanalco may deduct or must capitalize the costs of replacing

substantial portions of the brick floors of its cell rooms with

Fondag cement.   We hold these costs must be capitalized.   (3)

Whether Vanalco may deduct or must capitalize the cost of

replacing a portion of its ingot plant roof.    We hold this cost

may be deducted.

Background

     This case was submitted fully stipulated under Rule 122.2

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.

     Vanalco is an S corporation whose principal office was

located in Vancouver, Washington, at the time the petition was

filed.   Petitioner, Richard L. Smith, whose mailing address was

Lexington, Massachusetts, at the time he filed the petition, is

Vanalco's tax matters person.


     1
      The parties agree that $47,091 of the adjustment in the
1992 FSAA is not in dispute.
     2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable years at
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure. All dollar amounts are rounded to the
nearest dollar.
                               - 3 -


     Vanalco is in the business of smelting aluminum.   In 1987,

Vanalco purchased its smelting facility from ALCOA, which had

begun operations at this facility in 1940.   The basic elements

required to make aluminum are alumina, electrical energy, and

carbon.   The chemical process involved in the production of

aluminum is electrolysis.

     In the smelting process, large buckets carried by overhead

cranes bring alumina to hoppers positioned on top of reduction

cells (cells).   The hoppers feed the alumina into the center of

each cell where it is dissolved in a bath of a molten cryolite

solution (bath).   An anode, which is a cubical carbon block

attached to a copper rod, is introduced into the cell, and

electrical current is passed from the anode, through the alumina-

cryolite solution, and into a cathode.   Cathodes are carbon

blocks that line the bottom of the cell.   The electrical current

flows out of the cathode through embedded steel collector bars,

then through a riser and into the anode in the next cell.    The

electrical current reduces the alumina to aluminum and oxygen,

and this process produces aluminum continuously.   Every other day

the molten metal is removed from the cells and transferred to a

casting area called the ingot plant (the plant).   In the plant,

the molten metal may be either poured into molds directly and

allowed to solidify or combined with other alloys and cast into

pig or log shapes.
                               - 4 -


     Vanalco uses 636 low current density (LCD) cells and 14 N-40

cells in its smelting operation.   The LCD cells are oblong steel

shells approximately 22 feet in length, 3 feet in height, and

more than 6 feet in width that sit on steel cradles over which

anodes hang from a large steel superstructure.   The N-40 cells

essentially are the same as the LCD cells, except that the N-40

cells are approximately 3 feet shorter.   The interior of each

shell is covered with a cell lining.

     The 650 cells are in 10 "rooms", which are areas that each

contain 65 cells.   In the rooms, each cell is placed within 24 to

28 inches of another cell.   Two rooms of cells are connected

together in a "pot line" by bus bars, through which electricity

flows.   Thus, 130 cells make up each pot line, and the cells in

each pot line share the same electrical current.

     The cells are arranged in such a way that any cell can be

bypassed when circumstances warrant.   A cell is bypassed or

"shunted" from the line by disconnecting the riser from the

superstructure and redirecting the flow of electricity.   On

average, 8 or 10 cells are shunted out of line for replacement of

their linings at any given time; however, Vanalco cannot operate

its system on a sustained basis without substantial modifications

to its electrical system unless a minimum of 112 cells are in

operation.
                                - 5 -


The Cell Lining Replacement

     The voltage of the cells is monitored to ensure that the

cells are operating properly.   When the voltage in a cell cannot

be maintained at a certain level or within a specified range, it

generally indicates that something is wrong with the cell lining.

In this circumstance, if all other attempts to restore the proper

operation of the cell fail, the cell will be bypassed and removed

from service to have its lining replaced.

     When a cell ceases to operate properly and a sample of the

molten aluminum shows an iron content above a certain level, it

is most likely that the cell lining has eroded to expose the

steel collector bars or the shell.      At this point, the lining is

burned or eroded to the point where a substantial number of the

cathode blocks are no longer recognizable.     If the lining is not

replaced in this circumstance, the cell eventually will rupture

and molten metal will spill onto the floor.

     The following materials make up the cell lining:     Cathode

blocks made of carbon,3 steel collector bars, refractory brick

made of silicate material, castable refractory, steel plate,




     3
      Cathode blocks make up the bulk of the cell lining. For
instance, each LCD cell requires 8 blocks that are 60 inches by
18 inches by 14 inches, 2 blocks that are 60 inches by 15 inches
by 14 inches, 1 block that is 60 inches by 17 inches by 14
inches, 2 blocks that are 30 inches by 18 inches by 14 inches,
and 2 blocks that are 30 inches by 17 inches by 14 inches.
                                - 6 -


insulation board, carbon sidewall blocks, carbon lining paste,

and various nuts and bolts.

     Once it is determined that the cell lining must be replaced,

the cell is shunted from the pot line and the carbon anodes are

removed.   The cell is allowed to cool for 20 hours, and then

water is added to further cool the cell and to soften the lining

materials.   The steel superstructure and the cell shields are

removed next, and repairs, if required, are made to the

superstructure.   The cell lining crew (the crew)4 then removes

the cooled, solidified electrolyte and aluminum metal from the

cell cavity, and the cell is dug with pot diggers to remove the

remaining cell lining.   Once the lining has been removed, the

shell and shell cradle are taken to the shell repair area for any

necessary repairs.

     A repaired shell and shell cradle are put in the vacant

place in the pot line, and the replacement lining is installed in

layers.    First, the bottom of each shell is lined with two layers

of insulating block, and a layer of sheet metal is placed on top

of the insulating block to form a vapor barrier.   Next, two

layers of heavy refractory fire brick are added on top of the

metal vapor barrier, and the cathode blocks with embedded steel

connector bars are placed in rows on top of the refractory fire



     4
      Vanalco employs between 22 and 26 workers on the crew.
                                   - 7 -


brick.   The crew then installs the carbon sidewall blocks around

the sides of the shell to cover the area from the cathode blocks

to the top of the shell.       Finally, the crew rams paste around and

between the cathode blocks to create a smooth, solid cell cavity.

     After the lining is replaced, the collector bars are

connected to a ring bus, the steel superstructure is reinstalled

above the cell, new anodes are hung from the superstructure, and

the cell shields are reinstalled over the shell.       Finally, the

cell is reconnected to the pot line; however, the relined shell

is not operational until the replacement lining and cathode

blocks have "baked" for 48 hours.        The average time for a cell to

be out of service for replacement of its lining is 15 days.

     Unless otherwise noted, the 1992 and 1993 replacement costs

(including labor and allocable overhead) for the cell components

and the average useful life in years for each component are as

follows:

 Component                      Cost                Average Life
                           1
Cell lining                 $17,933                         3.0
                                                        2
Cell cradle                   5,583                       26.4
                                                        3
Shell                        10,084                       53.8
                                                          4
Carbon anode                  1,184                         0.0
Anode assembly:
  Copper rods                    2,240                       5.0
  Steel stubs                      423                       1.0
  Bolts                            249                       4.1
  Nuts                              14                       0.5
  Cast iron                         13                       0.3
Cell shield                        580                      10.4
Anode clamp                        197                       5.3
Flexible strap                   2,166                      13.0
                               - 8 -

                           5
Ring bus                    11,000                   59.0
                             5
Riser                          6,400                 59.0
                             5                     6
Ore bin                        3,000                 54.0
                           5                       6
Superstructure               35,100                  54.0
                             5                     7
Alumina feeder                3,500                  32.0
  Total                   $99,666
     1
       In addition to this cost for installing a replacement cell
lining, Vanalco paid approximately $5,401 per failed cell to tear
out the exhausted lining plus some miscellaneous costs.
     2
       Substantial repairs have been made to the cell cradles
since
they were placed in service.
     3
       The end sections of each shell have been in service for
approximately 59 years and have been repaired. Many of the
center sections have been replaced within the last 10 years.
     4
       The carbon anodes have a useful life of 14 days. The
expense of this component is not at issue.
     5
       These components were not replaced during the years at
issue. The dollar amounts reflect the 1998 replacement costs.
     6
       Vanalco extended the length of the ore bins and the
superstructures by approximately 3 feet. Except for the
extensions, the ore bins and superstructures have been in service
for approximately 54 years.
     7
       Approximately 30 percent of the alumina feeder must be
replaced every 3 or 4 years. The remaining portion has been in
service for approximately 32 years.

     Vanalco reported a repair expense of $4,411,245 for the cost

of replacing the linings of 206 cells in 1992 and $4,224,991 for

the cost of replacing the linings of 192 cells in 1993.

The Cell Room Floors

     Vanalco has 10 cell rooms,5 which are each approximately 722

feet in length and 47 feet in width.   Each cell room is divided

lengthwise into three sections--a center section with the cells,

a section to one side called the "tap end", and a narrower


     5
      The cell rooms are numbered 4, 6, 8, 10, 12, 14, 16, 18,
20, and 22.
                                 - 9 -


section on the other side called the "duct end".    The tap end of

the cell room is an area where molten metal is tapped, excess

bath and wasted anodes are placed after removal from the cells,

and front-end loading machines operate.    The tap ends vary in

size from 7,000 to 8,500 square feet.

     Originally, each cell room had a concrete subfloor

strengthened with iron rebar overlaid with bricks.    The brick

layer acted as insulation to prevent electrocution by contact

with the rebar in the subfloor.    ALCOA used this type of floor

for over 40 years and employed a full-time brick replacement crew

to maintain the integrity of the brick insulation.

     However, in part because of the introduction of mechanical

equipment and in part because of direct contact with wasted

anodes and with molten aluminum and bath, the brick layer became

so worn that it was hazardous.    In some places the brick layer

was worn down to expose the concrete and rebar subfloor, which

created a risk of electrocution.    Furthermore, the surface of the

floor was very irregular because of the replacement of many

bricks over many years.   As a result of the uneven surface,

Vanalco reported 21 accidents due to falls in the first half of

1992.

     Vanalco repaired the floor by replacing bricks and also

tried patching areas with Portland cement.    Portland cement did
                              - 10 -


not prove to be a satisfactory substitute because it required 2

weeks to cure fully and it could not withstand heavy use.

     Accordingly, Vanalco decided to replace sections of the

brick layer with Fondag cement.6   Fondag cement is more pliable

than regular cement, and it sets much more quickly and is easier

to use.   Moreover, like brick, Fondag cement acts as an

insulator.

     In comparison to brick, however, Fondag cement is a much

superior material for an insulating floor covering.   For

instance, Fondag cement floors are easier and quicker to repair

than brick floors because as small areas of the Fondag cement

floor wear down, the small areas can be made to match the level

of the less worn unrepaired surrounding floor surface without

having to replace a large area as is necessary with brick floors.

In addition, the Fondag cement floor can be made more level than

the brick floor, which improves safety and allows the use of

labor-saving mechanical cleaning equipment.   Most importantly,

Fondag cement becomes electrically nonconductive in 24 hours

compared to 7 or more days for brick.

     Vanalco removed and replaced the bricks with Fondag cement




     6
      Fondag cement contains approximately 38 to 40 percent
alumina, 37 to 39 percent calcium oxide, 15 to 18 percent ferrous
oxide and ferric oxide, and 3 to 5 percent silicon dioxide.
                                 - 11 -


on the following floor sections:

     Year              Cell Room No.            Floor Section

     1991                    6                Tap end

     1992                    20               Tap end
                       10, 12, 14, 18         Center
                           16, 22             Tap end and center

     1993                   8, 10             Tap end
                           14, 18             Tap end and center

     1994                     4               Tap end
                         10, 20, 22           Center
                             12               Tap end and center

     1995                4, 6, 8, 10          Center
                         12, 14, 16

     Thus, by 1995, the brick floors of all the tap end and

center sections were removed and replaced with Fondag cement

floors.     Vanalco reported repair expenses of $386,327 and

$408,154 for the cost of the replacements in 1992 and 1993,

respectively.

The Ingot Plant Roof

     Molten metal is tapped into large crucibles and transported

by large forklift trucks from the cell rooms to the plant.        In

the plant, the molten metal is either poured directly into 900-

pound ingot molds and allowed to solidify, or it is placed into

furnaces where the metal is alloyed and then cast into either 30-

pound ingots or cylindrical billets.      Finally, the finished

metal, whether in ingot or billet form, is prepared for shipment.
                              - 12 -


     The plant is an independent structure that has a different

type of roof than the adjoining buildings.   Because of the

potential of fire from a molten metal explosion, the plant's

122,567-square-foot roof must be made of fire-resistant material.

The roof must also be without leaks as rain water hitting the

molten aluminum could cause an explosion that would spray molten

metal over the plant.   Thus, a leak in the plant roof could

result in damage to plant equipment and would present a

significant safety hazard to plant employees.

     During 1989 and 1990, Vanalco removed and replaced 1,414

square feet of roof decking and 26,954 square feet of roofing

material.   In 1991, Vanalco removed and replaced 23,171 square

feet of roof decking and roofing material.   In 1992, Vanalco

removed and replaced 12,927 square feet of roof decking and

roofing material.   In 1994, Vanalco removed and replaced 15,145

square feet of roof decking and roofing material.7   Thus, during

the period 1989 through 1994, Vanalco removed and replaced 42,514

square feet of roof decking and 78,197 square feet of roofing

material.




     7
       Thus, during 1989 and 1990, Vanalco replaced 1.15 percent
of the roof decking and 21.99 percent of the roofing material.
In 1991, Vanalco replaced 18.90 percent of the decking and
roofing material; in 1992, it replaced 10.55 percent; and, in
1994, it replaced 12.36 percent.
                              - 13 -


     The original plant roof had corrugated sheet metal roof-

support decking.   However, at the time Vanalco repaired the roof

areas, the pattern of the original metal support decking was not

available.   Because of the unavailability of the original

material, Vanalco used 2- by 6-inch tongue-and-groove fire

resistant wood decking to replace the corrugated metal decking.

     Vanalco reported a repair expense of $115,346 for the

removal and replacement of the roof material and decking in 1992.

Discussion

     Section 162 allows the deduction of "all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business".    Section 1.162-4, Income Tax

Regs., provides:

     The cost of incidental repairs which neither materially
     add to the value of the property nor appreciably
     prolong its life, but keep it in an ordinarily
     efficient operating condition, may be deducted as an
     expense * * *. Repairs in the nature of replacements,
     to the extent that they arrest deterioration and
     appreciably prolong the life of the property, shall * *
     * be capitalized * * *.

     On the other hand, section 263(a) provides that no deduction

shall be allowed for (1) "Any amount paid out for new buildings

or for permanent improvements or betterments made to increase the

value of any property or estate", or (2) "Any amount expended in

restoring property or in making good the exhaustion thereof for

which an allowance is or has been made."   Sec. 263(a)(1) and (2).
                                - 14 -


Such an amount "is a capital expenditure that is taken into

account through inclusion in inventory costs or a charge to

capital accounts or basis".    Sec. 1.263(a)-1(b), Income Tax Regs.

     Within the scope of section 263(a)(1) are those amounts paid

or incurred (1) to add to the value, or substantially prolong the

useful life, of property owned by the taxpayer, or (2) to adapt

property to a new or different use.      See sec. 1.263(a)-1(b),

Income Tax Regs.    However, section 1.263(a)-1(b), Income Tax

Regs., specifically recognizes that "Amounts paid or incurred for

incidental repairs and maintenance of property are not capital

expenditures * * *.    See section 162 and § 1.162-4."

     Thus an expense which is "incidental" is currently

deductible and is not a capital expenditure.      If the repair is an

improvement or replacement, or if it increases the property's

value or substantially prolongs its useful life, it is capital in

nature and is not currently deductible.      See Wolfsen Land &

Cattle Co. v. Commissioner, 72 T.C. 1, 14 (1979).

     An important factor in determining whether the appropriate

tax treatment is immediate deduction or capitalization is the

taxpayer's realization of benefits beyond the year in which the

expenditure is incurred.    See INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 87 (1992); United States v. Wehrli, 400 F.2d 686, 689

(10th Cir. 1968).     This is not an absolute rule, however, as the

benefits of expenditures considered to be currently deductible
                              - 15 -


often extend beyond the current year.   See United States v.

Wehrli, supra.

     The distinction between repairs and capital improvements has

also been characterized as follows:

          The test which normally is to be applied is that
     if the improvements were made to "put" the particular
     capital asset in efficient operating condition, then
     they are capital in nature. If, however, they were
     made merely to "keep" the asset in efficient operating
     condition, then they are repairs and are deductible.
     [Moss v. Commissioner, 831 F.2d 833, 835 (9th Cir.
     1987) (quoting Estate of Walling v. Commissioner, 373
     F.2d 190, 192-193 (3d Cir. 1967), revg. and remanding
     45 T.C. 111 (1965)), revg. T.C. Memo. 1986-128.]

See also Illinois Merchants Trust Co. v. Commissioner, 4 B.T.A.

103, 106 (1926) ("In determining whether an expenditure is a

capital one or is chargeable against operating income, it is

necessary to bear in mind the purpose for which the expenditure

was made.").

     In Plainfield-Union Water Co. v. Commissioner, 39 T.C. 333,

338 (1962), the Court articulated a test (the Plainfield-Union

test) for determining whether an expenditure is capital by

comparing the value, use, life expectancy, strength, or capacity

of the property after the expenditure with the status of the

property before the condition necessitating the expenditure

arose.   See Norwest Corp. & Subs. v. Commissioner, 108 T.C. 265,

279-280 (1997).
                              - 16 -


     Whether an expenditure may be deducted or must be

capitalized is a question of fact.     See INDOPCO, Inc. v.

Commissioner, supra at 86; Norwest Corp. & Subs. v. Commissioner,

supra at 280; Plainfield-Union Water Co. v. Commissioner, supra

at 337-338.   The Supreme Court has recognized that

     the "decisive distinctions" between current expenses
     and capital expenditures "are those of degree and not
     of kind," and that because each case "turns on its
     special facts" the cases sometimes appear difficult to
     harmonize. [INDOPCO, Inc. v. Commissioner, supra at
     86; citations omitted.]

     Thus, "Courts have adopted a practical case-by-case approach

in applying the principles of capitalization and deductibility."

Norwest Corp. & Subs. v. Commissioner, supra at 280 (quoting

Wolfsen Land & Cattle Co. v. Commissioner, supra at 14).

Accordingly, we shall not attempt to harmonize the decided cases;

"Rather, we shall discuss the facts as reflected in the record

before us and arrive at a conclusion, recognizing that we shall

be engaging in an exercise in line drawing".     Badger Pipe Line

Co. v. Commissioner, T.C. Memo. 1997-457.

Replacement of the Cell Linings

     The parties agree on brief that the cell lining performs a

function that is vital and integral to the smelting process.    The

cell lining acts as the cathode, and without the passage of

electricity from the anode to the cathode, there would be no

electrolytic production of aluminum.    Furthermore, the cell will
                               - 17 -


rupture and the molten metal will spill once the integrity of the

lining is breached and the steel shell exposed, unless the cell

unit is taken out of operation and the lining is replaced.

     The parties have stipulated that (1) the cell linings have

an average useful life of approximately 3 years, and (2) the cost

of removing and replacing an exhausted lining is $23,334 plus

some miscellaneous costs.    Thus, the cell lining has a life that

is independent of the cell unit as a whole, and the cost of the

lining as a percentage of the total cost of the cell unit is

substantial.8    Moreover, the evidence submitted shows that the

replacement cell lining material is a very substantial portion of

the cell unit.    Cf. Badger Pipe Line Co. v. Commissioner, supra

(relocation of approximately 1,000 feet of a 25-mile 16-inch

pipeline); Libby & Blouin, Ltd. v. Commissioner, 4 B.T.A. 910,

914 (1926) (replacement of many small parts to repair a large

machine).

     The parties agree on brief that the cell lining is not an

asset separate from the cell unit.      However, considering the

facts and circumstances of this case, the difference between the

cell lining as a separate asset and as a substantial and

essential component is one of semantics, not substance.      Cf.



     8
      The replacement cell lining is 22.21 percent of the cost of
the rehabilitated cell unit (($17,933 + $5,401) ÷ ($99,666 +
$5,401)).
                                - 18 -


LaSalle Trucking Co. v. Commissioner, T.C. Memo. 1963-274

(considerable evidence that trucking company's replacement

components, i.e., truck engines, cabs, and fuel tanks, were

independent capital assets).     Whether the cell lining is a

separate asset is not determinative of whether its replacement

cost may be deducted or must be capitalized.

     The cell unit comprises components with varying useful

lives.     However, the cell lining is an essential and substantial

component without which the cell cannot function.     According to

normal experience, the cells operate for approximately 3 years

before the lining is exhausted.     Once the lining fails, the cell

must be taken out of the pot line and cannot be put back in

operation until the lining has been removed and replaced in an

expensive, time-consuming procedure.     Cf. Buffalo Union Furnace

Co. v. Commissioner, 72 F.2d 399, 402 (2d Cir. 1934), revg. 23

B.T.A. 439 (1931).     This inescapable cycle of exhaustion and

restoration is repeated approximately every 3 years by every

cell.     Consequently, although some of the components of the cell

may have useful lives longer than that of the cell lining, the

productive phase of each cell's cycle ends upon the exhaustion of

its lining.     Cf. Ruane v. Commissioner, T.C. Memo. 1958-175.

        In replacing the lining the cell essentially is rebuilt,

thereby obtaining a new life expectancy of 3 years.     See Electric

Energy, Inc. v. United States, 13 Cl. Ct. 644, 667 (1987)
                                - 19 -


(replacement of horizontal elements of a boiler prolonged its

life and permitted commencement of a new 20-plus-year repair

cycle); Ruane v. Commissioner, supra.       In light of the facts of

this case, we find that replacing the cell linings cannot be

classified as an incidental repair, and the cost must therefore

be capitalized.   See Camilla Cotton Oil Co. v. Commissioner, 31

T.C. 560 (1958); Ruane v. Commissioner, supra; Electric Energy,

Inc. v. United States, supra.

The Cell Room Floors

       Between 1991 and 1995, Vanalco replaced the brick floors

of the tap end and center sections of all its cell rooms with

Fondag cement.    In 1992, Vanalco replaced the brick floors of the

tap end area of cell room 20, the center areas of cell rooms 10,

12, 14, and 18, and the tap end and center areas of cell rooms 16

and 22.   In 1993, Vanalco replaced the brick floors of the tap

end areas of cell rooms 8 and 10, and the tap end and center

areas of cell rooms 14 and 18.    The substantial nature of the

replacements during the years at issue tends to prove that they

were more than incidental repairs.       See Stark v. Commissioner,

T.C. Memo. 1999-1.

     The parties have stipulated that the replaced areas of the

floors were the areas that were subjected to the most mechanical

equipment traffic and that the replacements were due, in part, to

the introduction of the mechanical equipment.      Repairs to the
                              - 20 -


worn brick floors were unsatisfactory as the uneven floor surface

produced a hazardous condition.

     In comparison to the brick floors, the Fondag cement floors

are easier to repair, become electrically nonconductive much more

quickly, and provide a more level surface, which enhances safety

and allows the use of mechanical cleaning equipment.   It is clear

that replacing the bricks with Fondag cement provided a

substantial functional improvement.    See Missouri Pac. RR. Co. v.

United States, 204 Ct. Cl. 837, 854, 497 F.2d 1386, 1396 (1974);

see also Southern Pac. Transp. Co. v. Commissioner, 75 T.C. 497,

718 (1980) (technical superiority of welded rail, when used to

replace jointed rail, is functionally a betterment).

     The evidence shows that the old brick floors were worn out,

that patching was no longer practical, and that the introduction

of mechanical equipment required the use of a more suitable floor

material.   The evidence also shows that the new floors were

replacements and substantial improvements; therefore, the

replacements were not merely repairs that kept the building in an

ordinarily efficient, operating condition.   See Phillips & Easton

Supply Co. v. Commissioner, 20 T.C. 455, 460 (1953).

     Finally, the new, improved floors made the property more

valuable to Vanalco in its business, because the Fondag cement

enabled Vanalco to effect faster repairs and to use mechanical
                                - 21 -


cleaning devices, in addition to increasing the safety of its

employees.   See id.

     On the facts of this case, we hold that Vanalco must

capitalize the costs of replacing the brick floors of its cell

rooms with Fondag cement.

The Plant Roof

     The plant roof is 122,567 square feet.    During the period

1989 through 1994, Vanalco removed and replaced 42,514 square

feet of roof decking and 78,197 square feet of roofing material.

In 1992, Vanalco removed and replaced 12,927 square feet of roof

decking and roofing material.

     Petitioner argues that the replacement of the portion of the

roof in the year at issue was only to repair a leak and not part

of a plan of rehabilitation.    Respondent argues that the roof

repair was more than patching a few leaks, and that when this

repair is considered with the roof repairs performed in 1989

through 1994, it is evident that Vanalco had a plan to replace

most of its roof over a period of years.

     Expenses incurred as part of a general plan of

rehabilitation, modernization, or improvement must be capitalized

even though the same expenses if incurred separately would be

deductible as ordinary and necessary.    See United States v.

Wehrli, 400 F.2d at 689; Norwest Corp. & Subs. v. Commissioner,

108 T.C. at 280.   An asset need not be completely out of service
                                - 22 -


or in total disrepair for the general plan of rehabilitation

doctrine to apply.    See Norwest Corp. & Subs. v. Commissioner,

supra.   Whether a plan exists and whether an item is part of it

are usually questions of fact to be determined by a realistic

appraisal of all the surrounding facts and circumstances,

including the purpose, nature, extent, and value of the work

done.    See United States v. Wehrli, supra at 690.

     At the time of the roof repair, the plant was in operating

condition and had been for many years.    See Keller St. Dev. Co.

v. Commissioner, 37 T.C. 559, 568 (1961), affd. in part and revd.

in part 323 F.2d 166 (9th Cir. 1963); Kaonis v. Commissioner,

T.C. Memo. 1978-184, affd. without published opinion 639 F.2d 788

(9th Cir. 1981).     Furthermore, although portions of the roof were

repaired over a period of 5 years, no repairs were made during

1993.    Therefore, the repairs during the year at issue were not

part of a continuous process of roof rebuilding.      Nor is there

any evidence to support a finding that repairing the plant roof

was done in preparation or as part of a remodeling project.        Cf.

Norwest Corp. & Subs. v. Commissioner, supra at 284-285.      We

agree with petitioner that the roof repair was not part of a

general plan of rehabilitation.

     However, a finding that the roof replacement was not part of

a general plan of rehabilitation does not mean that the

replacement was not an improvement to the plant the cost of which
                               - 23 -


must be capitalized.   In the year at issue, Vanalco removed and

replaced approximately 10.6 percent of the plant roof.   Vanalco

not only replaced the roofing material, which provides protection

from the rain, but also the decking that supports the roofing

material.    Therefore, the replacement included part of the roof

structure.

      There is no evidence that substitution of the 2- by 6-inch

wood decking for the corrugated metal provided a functional

improvement to the roof or materially added to the value of the

property, within the meaning of the regulations.   See Oberman

Manufacturing Co. v. Commissioner, 47 T.C. 471, 482 (1967).     Nor

is there evidence to support a finding that replacement of a

portion of the roof decking would appreciably prolong the life of

the property.    The facts do not support a finding that the

purpose of the repair was to put the roof in operation; to the

contrary, the facts show that Vanalco was performing ordinary

maintenance to repair leaks as they appeared and to keep the roof

in operating condition over its probable useful life.    See id.;

Hable v. Commissioner, T.C. Memo. 1984-485.

     Accordingly, we find that the cost of repairing the plant

roof is deductible as an ordinary and necessary expense under
                              - 24 -


section 162(a).   All other contentions in this case that have not

been addressed are irrelevant, moot, or meritless.

     To reflect the foregoing,

                                           Decision will be entered

                                       under Rule 155.
