The taxpayer, which had a 25% interest in an oil field under the North Sea, was not permitted to deduct a provision for the estimated costs to be incurred at a future date, on completion of production, in order to: restore to their original condition rigs and tankers that it had leased and adapted for use in connection with extracting or transporting the oil; removing a manifold, loading lines and buoy from the area; and capping wells and removing well heads.
The lease contracts were clearly capital assets, and expenditures to reconvert such assets should have the same character as expenditures to initially adapt them for purposes of the trade. The manifold, loading lines and buoy were installed under the authority of the license that required that they be removed when the exploitation of the field was completed and, accordingly, the cost of removal formed part of the cost that had to be incurred or which the consortium had to agree to incur in the future before it could commence its trading operations.