This section contains the nature of the case and procedural background.

P purchased 13 acres of farmland and proceeded to construct a drive-in or outdoor theatre. The slope of the land was such that the natural drainage of water was from the southerly line to the northerly boundary of the property and thence onto the adjacent land, owned by Nickolas, which was used both for farming and as a trailer park. P removed the covering vegetation from the land, slightly increased the grade, and built aisles or ramps. Rainwater falling upon it now drained with an increased flow into and upon the adjacent property of the Nickolas. This result should reasonably have been anticipated by P at the time when the construction work was done. Nickolas filed a suit against the P. The settlement agreement provided for the construction by P of a drainage system. It cost P $8,224, which amount was paid in 1950. P claimed a deduction of $822.40 for depreciation of the drainage system. D disallowed without itemization $5,514.60 of a total depreciation expense deduction of $19,326.41 claimed by P. P asserted that the entire amount spent to construct the drainage system was fully deductible in 1950 as an ordinary and necessary business expense incurred in the settlement of a lawsuit, or, in the alternative, as a loss, and claimed a refund of part of the $10,591.56 of income and excess profits tax paid by it for that year. D claimed it was a capital expenditure.

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