ply of water from the project lands within the district, appellant brought this suit to enjoin such action. The federal district court dismissed the bill, 283 Fed. 569; and its decree was affirmed by the circuit court of appeals. 288 Fed. 541. Both courts held that the cost was a proper charge as an operating expense and that the project lands in the district were liable for their proportionate part.

The contract with the district, among other things, provides: "The project lands in the district shall pay the same operation and maintenance charge per acre as announced by the Secretary of the Interior for similar lands of the Boise Project. We agree with the courts below that the charge in question fairly comes within this provision.

Section 4 of the Reclamation Extension Act, supra, prevents an increase in the construction charges to be imposed upon the water users without the consent of a majority of them after the amount thereof has been fixed. But this is far from saying that, after the completion of the irrigation system in accordance with the original plan in respect of which the construction charges were fixed, should the need arise to remedy conditions brought about by the use of the system, the government must bear the expense if a majority of the water users withhold their consent. Expenditures necessary to construct an irrigation system and put it in condition to furnish and properly to distribute a supply of water are chargeable to construction; but when the irrigation system is completed, expenditures made to maintain it as an efficient going concern and to operate it effectively to the end for which it was designed, are, at least generally, maintenance and operating expenses. The expenditure in question was not for extensions to new lands or for changes in or additions to the system made necessary by faulty original construction in violation of contractual or statutory obligations, Twin Falls Co. v. Caldwell, 272 Fed. 356, 369;

266 U. S. 85, but was for the purpose of overcoming injurious consequences arising from the normal and ordinary operation of the completed plant which, so far as appears, was itself well constructed. The fact that the need of drainage for the district lands, already existing or foreseen, had been supplied and the cost thereof charged to all the water users as a part of the original construction, by no means compels the conclusion that an expenditure of the same character, the necessity for which subsequently developed as an incident of operation, is not a proper operating charge. The same kind of work under one set of facts may be chargeable to construction and under a different set of facts may be chargeable to maintenance and operation. See Schmidt v. Louisville C. & L. Ry. Co., 119 Ky. 287, 301-302. For example, headgates originally placed are charged properly to construction; but it does not follow that if an original headgate be swept away, its replacement, though requiring exactly the same kind of materials and work, may not be charged to operation and maintenance.

Appellant says the lands within the district are not benefited by the drainage in question; and, if a direct and immediate benefit be meant that is quite true. But it is not necessary that each expenditure for maintenance or operation considered by itself shall directly benefit every water user in order that he may be called upon to pay his proportionate part of the cost. If the expenditure of today does not especially benefit him, that of yesterday has done so or that of tomorrow will do so. The irrigation system is a unit, to be, and intended to be, operated and maintained by the use of a common fund to which all the lands under the system are required to contribute ratably without regard to benefits specifically and directly received from each detail to which the fund is from time to time devoted.

This conclusion, we think, fairly accords with the principle established by the supreme court of the state in

Colburn v. Wilson, 24 Ida. 94, 104; and we see no merit in the contention that under the state law a ratable part of the cost of this drainage cannot be assessed by the district upon the project lands within its limits because they are not benefited thereby. The cost of draining the district project lands was met by a charge imposed in part and proportionately upon the lands in the project outside the district. If now, when the latter need like protection, the district lands are called upon to assume an equivalent obligation, it requires no stretch of the realities to see, following from such an equitable adjustment, a benefit on the whole shared by both classes of lands alike. But in any event, since we find that the expenditure in question properly is chargeable to operation and maintenance, appellant is liable under the express terms of its contract.

Decree affirmed.

DUFFY, COLLECTOR OF INTERNAL REVENUE v. CENTRAL RAILROAD COMPANY OF NEW JERSEY.

CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE THIRD CIRCUIT.

No. 129. Argued March 13,-16, 1925.-Decided April 13, 1925. 1. Expenditures made by a corporate lessee, as required by the lease, to create additions to the leased property and not for upkeep, are not maintenance and operation expenses deductible from its gross income of the tax year in which made, within the meaning of § 12 (a) Subd. "First," of the Revenue Act of 1916, but are betterments under Subd. "Second" of that section,-capital investment, subject to annual allowances for exhaustion or depreciation. P. 62.

2. Neither are such payments for betterments and additions, though made by the lessee pursuant to the lease, deductible under § 12 (a), Subd. "First as rentals or other payments" required to be made as a condition to the continued use or possession of

Argument for Petitioner.

66

268 U.S.

property etc., since rental" is there used in the usual sense implying a fixed sum, or property amounting thereto, payable at stated times for the use of property, and "other payments means payments ejusdem generis with rentals, such as taxes, insurance, etc. P. 63.

289 Fed. 354, reversed.

CERTIORARI to a judgment of the Circuit Court of Appeals affirming a recovery in the District Court of money paid under protest as income tax.

Mr. Alfred A. Wheat, Special Assistant to the Attorney General, for petitioner. The Solicitor General was on the brief.

All of the disbursements made by the taxpayer upon the premises occupied under the long-term leases are capital expenditures, and the only deduction allowable under the Revenue Act of 1916 is an annual deduction for depreciation. Technically speaking, of course, it is true that so far as the leases just mentioned are concerned the taxpayer is a lessee. But this does not mean that the payments made were rental, within the purview of § 12 (a). Indeed the admitted facts surrounding these particular leases conclusively show that the expenditures made upon these demised premises are capital investments. and, under the express terms of the Revenue Act of 1916, are not deductible in the year made, the only deduction allowed being for annual depreciation. Union Pac. R. R. Co. v. United States, 99 U. S. 402; Ill. Cent. R. R. Co. v. Interstate Comm. Comm. 206 U. S. 441; United States v. Central Pac. R. R. Co. 138 U. S. 84; Kemper Military School v. Crutchley, 274 Fed. 125; Grand Rapids, etc., Ry. Co. v. Doyle, 245 Fed. 792; Union Hollywood Water Co. v. Carter, 238 Fed. 329; Walker v. Gulf & I. Ry. Co. 269 Fed. 885; Grant v. Hartford, etc., R. R. Co. 93 U. S. 225; Haw. C. & S. Co. v. Tax Assessor, 14 Haw. Rep. 601; People v. Wilson, 121 N. Y. App. Div. 376; Highland Ry. Co. v. Balderston,

55

Argument for Petitioner.

2 Gr. Br. Tax Cas. 485; Clayton v. Newcastle Corp. 2 Gr. Br. Tax Cas. 416.

All of the disbursements made for additions and betterments upon the properties leased from the city of New York are capital expenditures, hence are not deductible in the year made under § 12 (a) of the Revenue Act of 1916 from the gross income for that year, but the cost should be spread over the term of the lease and an aliquot part deducted annually. A disbursement was made by the taxpayer in 1916 for the construction of a new pier, located on property covered by a lease from the city to the taxpayer by assignment. The improvement is of a permanent nature. It was not an outlay for the maintenance of property. It is a capital asset from which the taxpayer will derive the benefit of increased pier facilities, resulting in increased revenues. Read in the light of this construction of § 12 (a), which its language undeniably supports, article 140 of Regulations 33 (revised) is a reasonable regulation, affording as it does an equitable relief to a taxpayer who, for the purpose of increasing his business capacity, makes extensive improvements upon leased property, by allowing a deduction for capital expenditures upon a prorated basis, which he otherwise would not be entitled to, unless the payment was required to be made in order to continue in possession of the premises. Moreover, this executive construction of § 12 (a), as shown by the regulations, was known to Congress when it enacted § 234 (a) of the Revenue Act of 1918, which is almost identical with § 12 (a) of the Revenue Act of 1916, and in effect constitutes a reënactment of that section. This reënactment, therefore, is an approval or ratification on the part of Congress of such construction. United States v. Falk, 204 U. S. 143; United States v. Hermanos y Compania, 209 U. S. 337; Komada v. United States, 215 U. S. 392; National Lead Co. v. United States, 252 U. S. 140.