## Facts

- Harrah’s Club of Reno operated hotels and casinos and maintained an in-house collection of roughly 1,000 antique automobiles used to attract and entertain customers.
- Harrah’s undertook an extensive restoration program to return automobiles to near-original condition for long-term display and promotional use.
- Restored automobiles were kept for long periods (reported as up to 30 years), and once restored they were unlikely to require another restoration; none had been restored a second time.
- Restoration expenditures often exceeded the automobiles’ fair market value after restoration.
- For tax purposes, Harrah’s split restoration costs into (1) an amount equal to the restored automobile’s fair market value and (2) “excess restoration costs” above that value.
- Harrah’s treated the “excess” portion as a separate depreciable asset and claimed depreciation deductions over a proposed 5–10 year period based on management’s view that promotional displays might be refreshed by replacing cars after several years.
- The IRS disallowed the claimed deductions, and Harrah’s sued for an income tax refund in the United States Court of Claims.

## Issues

1. Whether Harrah’s restoration expenditures (including amounts exceeding post-restoration market value) were deductible as current ordinary and necessary business expenses under I.R.C. § 162.
2. Whether “excess restoration costs” could be treated as a separate asset and depreciated under I.R.C. § 167 over a 5–10 year promotional useful life distinct from the automobiles’ longer useful lives.
3. Whether the restoration costs instead had to be capitalized into the basis of the automobiles as improvements to long-lived tangible property.

## Decision

- The Court of Claims ruled for the United States and denied Harrah’s refund claim.
- The court held that Harrah’s could not deduct the “excess” restoration expenditures as current expenses.
- The court also held that Harrah’s could not separate the “excess” restoration costs from the automobiles and depreciate that component over a short promotional period.
- The restoration expenditures were treated as capital costs of improving the automobiles, recoverable (if at all) through depreciation consistent with the automobiles’ actual useful lives.

## Legal Principles

- Expenditures that materially restore, improve, or prolong the useful life of tangible property are capital expenditures rather than current business expenses.
- Depreciation under I.R.C. § 167 must be tied to the property’s useful life in the taxpayer’s business and cannot be based solely on managerial preferences about rotating displays or marketing strategy.
- A taxpayer generally may not carve an integrated restoration/improvement cost into a purported separate “excess” element and depreciate that element rapidly when the underlying asset remains usable and long-lived.
- The fact that restoration costs exceed post-restoration market value does not, by itself, convert part of the expenditure into a distinct depreciable promotional asset.

## Conclusion

The Court of Claims held that Harrah’s antique automobile restoration costs were capital improvements to long-lived tangible property, not current deductions and not a separable “excess” asset depreciable over a short promotional useful life, and it sustained the IRS’s disallowance of the claimed deductions.


Harrah’s Club v. United States, 81-1 U.S.T.C. (CCH) ¶ 9466 (Ct. Cl. 1981)