Hospital Corporation of America and Subsidiaries v. Commissioner

109 T.C. No. 2UNITED STATES TAX COURT
HOSPITAL CORPORATION OF AMERICA AND SUBSIDIARIES, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 10663-91, 13074-91, Filed July 24, 1997.
28588-91, 6351-92.
Ps own, operate, and manage hospitals and related
businesses. For taxable years ended 1985 through 1987
Ps claimed depreciation deductions based on 5-year
recovery periods for certain properties they placed in
service during those years, which properties Ps claim
constitute tangible personal property. R determined
that the properties constitute structural components of
the buildings to which they relate and that the
properties therefore must be depreciated over the same
recovery periods as those buildings.
Held: For purposes of assigning appropriate
recovery classes or recovery periods to the properties
to determine allowable depreciation deductions pursuant
to sec. 168, I.R.C., tests developed under prior law
for purposes of the investment tax credit are
applicable to decide whether the property constitutes
tangible personal property.
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Held further: The prohibition contained in sec.
168, I.R.C., against the use of the component method of
depreciation does not preclude the use of an analysis
based on Scott Paper Co. v. Commissioner, 74 T.C. 137(1980), and its progeny, and sec. 1.48-1(1), Income Tax
Regs., and accordingly such authorities are applied to
assign appropriate recovery classes or recovery periods
to the properties in issue.
N. Jerold Cohen, Randolph W. Thrower, J.D. Fleming, Jr.,
Walter H. Wingfield, Stephen F. Gertzman, Reginald J. Clark,
Amanda B. Scott, Walter T. Henderson, Jr., William H. Bradley,
and John W. Bonds, Jr., for petitioners in docket No. 10663-91.
N. Jerold Cohen, Randolph W. Thrower, J.D. Fleming, Jr.,
Walter H. Wingfield, Stephen F. Gertzman, Reginald J. Clark,
Amanda B. Scott, Walter T. Henderson, Jr., William H. Bradley,
John W. Bonds, Jr., and Daniel R. McKeithen, for petitioners in
docket No. 13074-91.
N. Jerold Cohen, Walter H. Wingfield, Stephen F. Gertzman,
Amanda B. Scott, Reginald J. Clark, Randolph W. Thrower, Walter
T. Henderson, Jr., and John W. Bonds, Jr., for petitioners in
docket No. 28588-91.
N. Jerold Cohen, Reginald J. Clark, Randolph W. Thrower,
Walter T. Henderson, Jr., and John W. Bonds, Jr., for petitioners
in docket No. 6351-92.
Robert J. Shilliday, Jr., Vallie C. Brooks, and William B.
McCarthy, for respondent.
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WELLS, Judge: These cases were consolidated for purposes of
trial, briefing, and opinion and will hereinafter be referred to
as the instant case.1 Respondent determined deficiencies in
petitioners' consolidated corporate Federal income tax as
follows:
TYE Deficiency
1978 $2,187,079.00
1980 388,006.58
1981 94,605,958.92
1982 29,691,505.11
1983 43,738,703.50
1984 53,831,713.90
1985 85,613,533.00
1986 69,331,412.00
1987 294,571,908.00
1988 25,317,840.00
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the years in issue, and all
1
The instant case involves many issues, some of which have
been settled or decided. The issues remaining for decision
involve matters falling into two reasonably distinct categories,
which the parties have denominated the MACRS depreciation issue
and the captive insurance or Parthenon Insurance Co. issues. The
MACRS depreciation issue was presented at a special trial session
with two other distinct categories of issues that we previously
decided, and the captive insurance issues were severed for trial
purposes and were presented at a subsequent special trial
session. Separate briefs of the parties were filed for each of
the distinct categories of issues. We decided tax accounting
issues in Hospital Corp. of Am. v. Commissioner, T.C. Memo. 1996-
105; Hospital Corp. of Am. v. Commissioner, 107 T.C. 73 (1996);
and Hospital Corp. of Am. v. Commissioner, 107 T.C. 116 (1996).
We decided an issue related to the sale of the stock of certain
subsidiaries to HealthTrust, Inc.--The Hospital Company in
Hospital Corp. of Am. v. Commissioner, T.C. Memo. 1996-559. The
Parthenon Insurance Co. issues will be addressed in a separate
opinion subsequently to be released. The instant opinion
involves the MACRS depreciation issue.
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Rule references are to the Tax Court Rules of Practice and
Procedure.
The issues to be decided concern the appropriate recovery
classes (for tax years ended 1985 and 1986) or appropriate
recovery periods (for tax years ended 1987 and 1988) for certain
tangible property that petitioners placed in service during those
years. To decide whether petitioners utilized the proper
recovery classes or periods in calculating their claimed
depreciation deductions for those taxable years, we must decide
(1) whether the tests developed under prior law for purposes of
the investment tax credit are applicable, and, if so (2) whether
the respective properties constitute section 1245 personal
property or section 1250 real property pursuant to those tests.
FINDINGS OF FACT
Some of the facts have been stipulated for trial pursuant to
Rule 91. The parties' stipulations of fact are incorporated
herein by reference and are found as facts in the instant case.
Petitioners were members of an affiliated group of
corporations whose common parent was Hospital Corporation of
America (HCA), which was incorporated under the laws of the State
of Tennessee.2 HCA maintained its principal offices in
2
On Feb. 10, 1994, HCA was merged with and into Galen
Healthcare, Inc., a subsidiary of Columbia Healthcare Corp. of
Louisville, Kentucky, and the subsidiary changed its name to HCA-
Hospital Corp. of America. On that same date, the parent changed
(continued...)
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Nashville, Tennessee, on the date the petitions were filed. For
each of the taxable years involved in the instant case, HCA and
its domestic subsidiaries filed a consolidated Federal corporate
income tax return (consolidated return) on Form 1120 with the
Director of the Internal Revenue Service Center at Memphis,
Tennessee.
Petitioners' primary business is the ownership, operation,
and management of hospitals. In Hospital Corp. of Am. v.
Commissioner, T.C. Memo. 1996-105, we set forth a detailed
description of petitioners' hospital operations, which will not
be reiterated here. We incorporate herein our findings of fact
contained in that Memorandum Opinion.
During the taxable years in issue, petitioners constructed a
number of hospital facilities. Those hospital facilities consist
generally of 10 different categories, which the parties
denominate as follows: (1) Large Medical/Surgical Facilities;
(2) Small Medical/Surgical Facilities; (3) Ancillary Facilities;
(4) Radiology Facilities; (5) Small Psychiatric Facilities; (6)
Large Psychiatric Facilities; (7) Obstetrics Facilities; (8)
Ambulatory Surgery Facilities; (9) Patient Bed Facilities; and
(10) Ancillary II Facilities.
On their tax returns for taxable years ended 1985, 1986, and
1987, petitioners classified as tangible personal property
2
(...continued)
its name to Columbia/HCA Healthcare Corporation.
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certain items relating to hospital facilities constructed during
those taxable years, and claimed the investment tax credit
(ITC),3 and depreciation deductions using a 5-year recovery
period. Respondent, however, determined in the notice of
deficiency that a number of those items were structural
components of the related buildings and not personal property,
that those items were not eligible for ITC, and that they must be
depreciated over the same recovery period as the buildings to
which they related. Prior to trial, the parties resolved the ITC
issue, leaving for trial the issue of the proper classification
of the property items for purposes of claiming the depreciation
deduction for the taxable years in issue.
On their tax returns for taxable years ended 1987 and 1988,
petitioners classified as tangible personal property certain
items relating to hospital facilities constructed during those
years and claimed depreciation deductions using a 5-year recovery
period. Respondent, however, determined in the notice of
deficiency that a number of those items were structural
components of the related buildings and that they must be
depreciated over the same recovery period as the buildings to
which they related.
3
The investment tax credit (ITC) was repealed by the Tax
Reform Act of 1986, Pub. L. 99-514, sec. 211(a), 100 Stat. 2166,
effective (subject to transition rules) for property placed in
service after Dec. 31, 1985.
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All of the property items in issue (disputed property items)
were installed in hospitals constructed for petitioners pursuant
to contracts with general construction contractors during taxable
years ended 1985, 1986, 1987, and 1988. The parties have agreed
as to the proper categorization and the total construction cost
of each facility, the cost bases of the particular disputed
property items,4 and the dates on which each of the facilities
(and the property items located therein) were placed in service.
The parties have agreed to procedures to be followed to implement
our decision once we decide the appropriate recovery classes (or
recovery periods) for the disputed property items.
The parties have designated one facility to serve as a
"representative facility" for each of the 10 different categories
of hospital facilities. The parties agree, however, that the
property items in petitioners' hospital facilities are identical
to each other in all material respects (i.e., manner of
4
For convenience, the parties have assigned various property
unit numbers to the disputed property items. The parties defined
and identified property units to include all functionally or
structurally related items. Property units are categorized as
either item property units or group or system property units.
From time to time we refer to the disputed property items by
their assigned property unit numbers.
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attachment, function, construction, and design) regardless of the
facility in which they are contained.
Description of the Disputed Property Items5
5
On brief, petitioners group the disputed property items into
categories denominated as follows: Primary and secondary
electrical distribution systems (Property Unit 1900); branch
electrical wiring and connections and special electrical
equipment (Property Units 2200, 2244, 2320, 3026, 3075, 3195,
3280, 3292, 3298, 4040); branch electrical wiring, connections
and receptacles relating to television equipment (Property Unit
2340); conduit, floor boxes, power boxes, and outlet jacks
relating to telephone equipment (Property Unit 2330); electrical
wiring, conduit, and connections relating to internal
communications systems (Property Unit 3090); carpeting (Property
Unit 2140); vinyl wall coverings (Property Unit 2380); vinyl
floor coverings and special purpose sheet vinyl (Property Unit
2370); kitchen water piping (Property Unit 3080) and kitchen
equipment steam lines (Property Unit 3070); special plumbing
connections relating to x-ray equipment (Property Unit 2244);
kitchen hoods and exhaust systems (Property Unit 3085); patient
corridor handrails (Property Unit 3190); overbed lights and
related electrical connections (Property Unit 4050); accordion
doors/partitions (Property Unit 3240); bathroom accessories and
partitions (Property Unit 2360) and plastic mirrors (Property
Unit 2385); acoustical tile ceilings (Property Unit 2260); and
steam boilers and related accessories (Property Unit 3193). On
brief, respondent groups the disputed property in a similar
manner except that respondent separates the property items
petitioners included in Property Units 2200, 2244, 2320, 3026,
3075, 3195, 3280, 3292, 3298, 4040 (disputed property items
relating to branch electrical wiring, etc.), Property Unit 2330
(disputed property items relating to telephone equipment),
Property Unit 2340 (disputed property items relating to
television equipment), and Property Unit 3090 (disputed property
items relating to internal communications systems) into
individual categories of conduit; electrical wiring; and
electrical outlets, receptacles, and junction boxes.
Additionally, respondent combines the property items petitioners
included in Property Units 3080 and 3070 (kitchen water piping
and kitchen equipment steam lines) and Property Unit 2244
(plumbing connections relating to x-ray equipment) into one
category of plumbing. We adopt generally in the instant opinion
the denomination of categories utilized by petitioners.
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1. Primary and Secondary Electrical Distribution Systems
The primary electrical distribution systems,6 which the
parties have designated as Property Unit 1900, accept electricity
from outside electrical power sources and deliver it to the
secondary electrical distribution systems contained within the
hospital facilities. Generally, the items comprising the primary
electrical distribution systems consist of (1) the electrical
wire and conduit extending from the outside power sources to the
main electrical distribution panels and (2) the main electrical
distribution panels themselves, also known as main switchgears.
In some instances, motor control centers or transformers also may
be included.
The secondary electrical distribution systems receive
electricity from the primary electrical distribution systems and
deliver it to the various electrical end-users located throughout
petitioners' hospital facilities (e.g., lighting fixtures, fire
protection systems, and hospital equipment). The items
comprising those secondary electrical distribution systems
consist of the electrical wire and conduit extending from the
primary electrical distribution panels to the secondary
electrical distribution panels, the secondary electrical
6
Respondent agrees that the items comprising petitioners'
primary and secondary electrical distribution systems are similar
to those items in issue in Morrison, Inc. v. Commissioner, T.C.
Memo. 1986-129, affd. 891 F.2d 857 (11th Cir. 1990).
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distribution panels themselves, and any transformers located
between the primary electrical distribution panels and the
secondary electrical distribution panels.
The main switchgears and the motor control centers are steel
cabinets which are attached to concrete pedestals using nuts that
are tightened onto bolts extending out of the pedestals.
Transformers have a construction similar to that of the
switchgears and the motor control centers and are either attached
to concrete pedestals in a manner similar to the switchgears and
the motor control centers or suspended from the overhead
structural framework of the hospital buildings using threaded rod
hangers. Screws or bolts attach the electrical panels to the
walls of the buildings.
The main panel and the main motor control centers range in
size from 91.5 inches high by 40 inches wide by 20 inches deep up
to 91.5 inches high by 60 inches wide by 20 inches deep. The
main panel is equal to or larger in size than the motor control
centers. The conduit from the main transformer to the main
switchboard is 42 inches underground and encased in a concrete
envelope.
The components of the primary and secondary electrical
systems are similar in nature, although they vary in size and
complexity depending on the various electrical loads carried by
them. Those components are installed during the construction
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phase by the electrical subcontractor. The conduit and wire in
both the primary and secondary electrical distribution systems
are custom fit for the initial place of installation.
The electrical wire constitutes the conductor used to carry
electrical power from the primary electrical distribution systems
to the secondary electrical distribution systems and from the
secondary electrical panels to various branch wiring items (e.g.,
circuit breakers, fuses). The electrical wire carries electrical
power to the secondary electrical panels and the branch circuits
for individual electrical loads.
Electrical wire is installed in electrical conduit.
Electrical conduit is typically aluminum, plastic, or galvanized
tubing or piping which is custom fit for the particular
application. Electrical conduit may be attached to the
structures of the hospital buildings using screws and brackets or
other appropriate fasteners. Electrical conduit serves as a
protective shield for electrical wire contained inside the
conduit and provides a pathway for the wire to travel from one
location to another. The conduit is integrated into a building
during the construction phase and is generally attached to
ceilings, floors, and walls, or encased in concrete.
Conduit may be inaccessible or hidden behind surfaces. Conduit
commonly is abandoned in place and not reused when a particular
item of equipment to which it relates is moved or retired.
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Although not a common occurrence, petitioners have moved and
reused some items (e.g., electrical panels, transformers, and
motor control centers) in connection with remodeling projects.
Workers started and completed the task in one evening. The items
were not damaged by being moved from one location within the
hospital to another, and after they were moved, the items
functioned in the same manner as they had prior to being moved.
The parties have stipulated that the percentage of the
electrical load carried by the primary and secondary electrical
distribution systems to hospital equipment is as follows:
Type of facility Percentage
Large Medical/Surgical 30
Small Medical/Surgical 36
Small Psychiatric 23
Large Psychiatric 26
The balance of the electrical load is carried to items related to
the operation or maintenance of petitioners' buildings.
2. Branch Electrical Wiring and Connections and Special
Electrical Equipment
a. In General
The branch wiring in the subject category is the wiring that
extends from the secondary distribution panels to either a duplex
outlet at or in a wall surface, or, in instances where a piece of
machinery is "hardwired",7 to a junction box mounted on or within
7
When equipment is "hardwired", the wiring connection of that
equipment is attached and secured directly to the electrical
(continued...)
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a surface of the building. The branch electrical wiring and
connections consist of conduit, wiring, and electrical
connections which relate to particular items of hospital
equipment. Specifically, the items of hospital equipment to
which the branch electrical wiring and connections in the subject
category relate are: (a) The emergency power generator controls,
battery packs, and battery chargers (Property Unit 2200); (b) the
x-ray film processing equipment (Property Unit 2244); (c) the
illuminated front entrance signs and emergency entrance signs
(Property Unit 2320); (d) the medical gas control equipment and
the medical gas alarm equipment (Property Unit 3026); (e) kitchen
equipment (e.g., braising pans, sanitizers, deep fryers,
toasters, ice makers/dispensers, and heat lamps) (Property Unit
3075); (f) equipment located in the hospital laboratories and
maintenance shop areas, such as tools and welding equipment,
specimen slicers, etc. (Property Unit 3195); (g) the
synchronously wired clock systems (Property Unit 3280); (h) the
air conditioners located in the hospital computer rooms (Property
Unit 3292); (i) the central sterilization equipment (Property
Unit 3298); and (j) special electrical equipment located in the
hospital operating rooms, recovery rooms, intensive care units,
infant nurseries, radiology areas, patient rooms, and
7
(...continued)
wiring in a junction box.
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laboratories (Property Unit 4040). Items of equipment for which
electrical connections are wired directly to the hospitals'
electrical systems include the front entrance sign, the emergency
entrance sign, the air conditioner for the computer equipment,
and the central sterilization equipment.
The branch electrical wiring and connections are required
for the operation and use of the equipment to which they relate.
The branch electrical wiring and connections are used only with
the items of equipment to which they relate.8
All of the electrical load carried by the branch electrical
wiring and connections is carried to the particular items of
equipment to which they relate. The conduit protects and houses
the wiring.
b. Wiring and Related Property Items Relating to
Kitchen Equipment (Property Unit 3075)
The disputed property items in Property Unit 3075 consist of
wiring, conduit, junction boxes, and outlets that provide
electricity required for the operation and use of hospital
kitchen equipment, including the kitchen hood fans and lights,
braising pans, sanitizers, deep fryers, toasters, ice
makers/dispensers, coffee urns, milk and ice cream dispensers,
and heat lamps. Those items are used only with the hospital
8
The parties agree that the items of equipment to which the
branch electrical wiring and connections in issue relate are
properly depreciable over 5-year periods.
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kitchen equipment. If necessary, some of the items could be
adapted for another use. In most instances, the items run from
the hospitals' secondary electrical distribution systems to a
wall near the equipment which they are intended to service.
c. Wiring and Related Property Items in the Laboratory
and Maintenance Shop (Property Unit 3195)
The disputed property items in Property Unit 3195 consist of
wiring, conduit, above-counter receptacles, circuit boxes, and
plugmoldings which make electricity available in the laboratory
and maintenance shop areas of the hospitals and provide localized
electrical power for various electrical end-users located in
those areas.9 Some of the items described in Property Unit 3195
are located in the walls between the hospitals' secondary
electrical distribution systems and either electrical outlets or
the particular equipment they are intended to serve. If
necessary, some of those items could be adapted for another use.
d. Wiring and Related Property Items in Other
Areas of the Hospitals (Property Unit 4040)
The disputed property items in Property Unit 4040 consist of
wiring, conduit, outlets, circuit boxes, and related electrical
isolation panels which make electricity available for the
operation and use of equipment located in the intensive care
9
Other wiring, conduit, receptacles, and junction boxes, which
are not contained in Property Unit Number 3195 but which the
parties agree relate to the operation and maintenance of the
hospitals' buildings, also make electrical power available in the
laboratory and maintenance shop areas.
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units, operating rooms, recovery rooms, infant nurseries, patient
rooms, radiology areas, laboratories, and kitchens. The
isolation panels and grounding receptacles ensure that the
medical equipment receiving electrical power from the isolated
electrical circuits does not leak electricity, which could shock
patients undergoing surgery or other forms of treatment. The
remote grounding receptacles are necessary for the common
grounding of equipment in those areas of the hospitals and are
necessary for the operation of the isolation panels.
3. Wiring and Related Property Items Relating to Television
Equipment (Property Unit 2340)
Disputed property items in Property Unit 2340 consist of
branch electrical wiring, conduit, junction boxes, outlet
receptacles, and equipment that is required for the operation and
use of the television equipment located in and outside of the
hospitals. Petitioners' use of the conduit and junction boxes is
due, in part, to local building codes. The items are used only
and directly with the television sets located in petitioners'
hospital facilities and the master television antennae attached
to petitioners' hospitals.10
Televisions are attached to the walls of the hospitals near
the room ceilings. The television outlet receptacles in issue
10
The television antenna and antenna wire are not in dispute.
The parties have agreed that the antenna, amplifier, and brackets
constitute 5-year property.
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are recessed in the walls approximately 18 inches below the
acoustical tile ceilings. The electrical outlet receptacles
relating to the televisions provide localized electrical power
sources for the televisions at standardized voltages and
standardized amperes. Most of the televisions are located in the
patient rooms of petitioners' hospitals.
The antenna conduit protects the television antenna cables
which extend between the master television antenna systems (or
cable television hook-ups) and the antenna/cable television
outlets located adjacent to the television outlet receptacles.
The conduit protects the antenna wiring contained within it and
is installed for the specific purpose of housing the television
antenna wiring.
4. Conduit, Floor Boxes, Power Boxes, and Outlet Jacks
Relating to Telephone Equipment (Property Unit 2330)
The telephone conduit, floor boxes, power boxes, and outlet
jacks in Property Unit 2330 are required for the use and
operation of the telephone equipment11 located in petitioners'
hospitals, due in part at least to local building codes. Those
items are used only and directly with that telephone equipment
and were installed specifically for use with the telephone
equipment.
11
The parties agree that the telephone equipment to which the
items in Property Unit 2330 relate is properly depreciable over
5-year periods.
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5. Electrical Wiring, Conduit, and Connections Relating to
Internal Communications Systems (Property Unit 3090)
The conduit, wiring, and electrical connections in Property
Unit 3090 are required for the use and operation of the
hospitals' internal communications systems (i.e., the nurse call
systems, the intercommunications systems, the dictation systems,
and the music and paging systems).12 Petitioners' use of the
conduit, floor boxes, and outlet jacks is due in part to local
building codes. Those items are used only and directly with the
equipment comprising those systems. The items in issue are
attached to the walls, floors, and ceilings of petitioners'
hospitals and are located between the secondary electrical
distribution systems and the particular items of equipment to
which they relate. The items are specifically for use with the
hospitals' internal communication systems.
6. Carpeting (Property Unit 2140)
The carpeting in Property Unit 2140 is the carpeting that
was originally placed in petitioners' hospital facilities during
construction. The carpeting is custom fit to the area in which
it is laid, and is installed over the sealed concrete floor using
adhesives. The adhesives prevent the carpeting from slipping or
skidding while it covers the floors of the hospitals.
12
The parties agree that the machinery and equipment to which
the items in Property Unit 3090 relate are properly depreciable
over 5-year periods.
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Petitioners typically replace carpeting after approximately
2-1/2 to 7 years of use due to heavy wear, soiling, and changes
in the decor of petitioners' hospitals.13 Workers remove the
carpeting by using a linoleum knife to lift up one corner of the
carpeting and then by pulling the carpeting by hand from the
concrete floors. Removal of the carpeting is not a difficult or
time-consuming process and does not damage the underlying
concrete floors. Petitioners typically discard the removed
carpeting. Petitioners do not allow the removed carpeting to be
reused because of potential health risks.
7. Vinyl Wall Coverings (Property Unit 2380)
The vinyl wall coverings originally placed in the various
hospital facilities are also in issue. The wall coverings
consist of 3-foot or 4-foot wide strips of vinyl fabric. The
strips of vinyl fabric are secured to the walls with an adhesive.
The walls are treated with glue sizing prior to placing the vinyl
wall coverings on the sheetrock walls of the hospital facilities.
The glue sizing protects the sheetrock walls from being damaged
upon a subsequent removal of the wall coverings.
The vinyl wall covering is used as an alternative to
painting the sheet rock walls. Due to heavy wear and to changes
13
In one of the representative facilities, after approximately
8 years of use, more than 95 percent of the carpeting in issue
had been removed and replaced. Petitioners intend to replace the
remaining 5 percent of that carpeting, which is badly soiled and
worn, when scheduling permits.
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in the decor of petitioners' hospital facilities, petitioners
remove and replace vinyl wall coverings after approximately 5 to
10 years of use.14
Removal of the wall coverings is accomplished by removing
the base molding covering the bottom edge of the wall covering,
grasping a corner of the wall covering, and pulling it off the
walls. Removal of the vinyl wall coverings does not damage
either the vinyl fabric or the sheetrock walls of the hospitals,
and any residual adhesives that remain on the walls can be
removed with very light sanding.
8. Vinyl Floor Coverings (Property Unit 2370)
The items in Property Unit 2370 consist of the vinyl tile
and sheet vinyl floor coverings originally placed in petitioners'
hospital facilities during construction. The floor coverings are
of three general types: (1) 12-inch by 12-inch vinyl tiles, (2)
8-foot wide sheet vinyl, and (3) seamless vinyl floor covering.
Petitioners utilize all three types of vinyl floor coverings
in a similar manner. The vinyl tiles are unpackaged, trimmed as
necessary, and attached to the hospital floors using adhesive.
The sheet vinyl is first cut to fit the area on which it is
placed and also is attached to the concrete floors of the
hospitals using adhesive. The seamless vinyl floor covering is
14
In one of petitioners' representative facilities, after
approximately 8 years of use, approximately 60 to 65 percent of
the vinyl wall coverings in issue had been replaced.
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installed similarly to the sheet vinyl but with its seams joined
together using heat.
Petitioners replace vinyl floor coverings after about 3 to 5
years due to wear and changes in the decor of petitioners'
facilities.15 The sheet vinyl and seamless vinyl floor covering
are composed of a softer material than vinyl composition tile.
Workers remove sheet vinyl by lifting one corner of the
vinyl and peeling it off the concrete floors. Workers remove
vinyl tile by using a mechanical scraper, which lifts the tiles
off the concrete floors without damaging the floors. The
underlying adhesives are typically dry and powdery after the
floor coverings are removed. Removal of the vinyl tile floor
coverings requires more effort than is necessary for removing
carpeting; nonetheless, with the proper tools and skill, removal
of the vinyl floor coverings goes relatively fast. Petitioners
discard the floor covering upon removal.
9. Kitchen Water Piping (Property Unit 3080) and Kitchen
Equipment Steam Lines (Property Unit 3070)
Petitioners maintain kitchens which are used to prepare
meals for most inpatients on a daily basis as a part of providing
health care services to those patients. Petitioners also operate
15
In one of petitioners' representative facilities, after
approximately 8 years of use, two-thirds of the original vinyl
floor coverings had been replaced.
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hospital cafeterias where food is sold to hospital employees,
visitors, and the public for cash.
The kitchen water piping in Property Unit 3080 consists of
the following distinct categories of items: (1) items relating
to the operation of the kitchen grease trap systems,16 the trench
drains, the grease waste piping, the grease waste excavation, the
grease waste fill, and the grease trap itself, and (2) plumbing
connections (including the hose reel connections) for particular
items of kitchen equipment. The piping is contained in the walls
of petitioners' hospital facilities and fastened to the building
structures.
The kitchen grease trap systems consist of underground tanks
and the related plumbing connections. The grease traps have
inlet chambers connected to kitchen waste pipes and outlet
chambers connected to the domestic sanitary sewers, and they
serve as buffers between the kitchen waste pipes and the sanitary
sewer systems. Their function is to remove grease and solid
matter from waste water leaving the kitchen areas while allowing
the remaining waste water to pass into the sanitary sewers.
The kitchen plumbing connections in issue supply water to
specific items of kitchen equipment, such as the dishwashers,
coffee urns, steam kettles, braising pans, and ice makers, and
16
Respondent agrees that the kitchen grease trap systems in
issue are similar to those in issue in Morrison, Inc. v.
Commissioner, T.C. Memo. 1986-129.
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remove the liquid wastes generated by that equipment. The
plumbing connections branch off of a hospital's main water lines
to the walls near the specific pieces of equipment the plumbing
connections are intended to serve. The plumbing connections are
necessary for the operation of the items of equipment to which
they relate and are used only with the items of equipment to
which they relate. If necessary, the connections could be
adapted for other uses. The hose reel connections are located
behind the walls and are used to connect the hose reel to hot and
cold potable water.
The kitchen equipment steam lines in Property Unit 3070 are
in all material respects identical to the kitchen plumbing
connections (Property Unit 3080) described above.
10. Special Plumbing Connections Relating to X-Ray
Equipment (Property Unit 2244)
The plumbing connections relating to the x-ray equipment are
required for the operation and use of the x-ray film processing
equipment located in petitioners' hospitals. Those connections
are used only with that equipment. The plumbing connections are
located in the walls and floors between the hospitals' main
plumbing lines and the x-ray film processing equipment they are
intended to serve. Removal of those plumbing connections would
not affect the hospitals' main water piping and sanitary
drainage.
- 24 -
11. Kitchen Hoods and Exhaust Systems (Property Unit 3085)
The kitchen hoods and exhaust systems consist of the cooking
area exhaust hoods and fans, the kitchen supply air intake fans,
the dishwasher exhaust fans, and related duct work. Dishwasher
condensate return units are also included.
The exhaust hoods and fans are placed directly over the
kitchen cooking equipment, where they collect and guide cooking
vapors, grease, smoke, humidity, and other fumes moving from the
kitchen cooking equipment into the exhaust duct work to be
expelled outside of the hospital buildings. The kitchen hoods
are installed on frames bolted to the overhead structure, and the
frames are attached to a reinforced concrete floor structure.
The sheet metal duct work is installed in a continuous run from
the kitchen hood through the floors overhead to a curbed roof
opening in a covered discharge unit. The kitchen exhaust hoods
contain their own chemical fire protection and lighting system.
The kitchen exhaust fans are attached with steel screws.
They do not serve to ventilate the hospital buildings generally,
and they are not part of the hospital buildings' heating,
ventilation, or air conditioning systems.
The kitchen supply air intake fans (or the "air make-up
units")17 replace the air removed from the kitchens by the
17
Respondent agrees that, with the exception of the condensate
return unit, although smaller, the kitchen supply air intake fans
(continued...)
- 25 -
kitchen exhaust fans to insure proper negative balance in the air
pressure. The kitchen supply air intake fans ensure that a
hospital kitchen maintains negative pressure with relation to the
remainder of the hospital building by replacing air that is
exhausted by the kitchen exhaust fans. The kitchen supply air
intake fans are attached to the roofs of petitioners' hospitals
using bolts and are connected to metal duct work used only with
that equipment.
The dishwasher exhaust fans remove moisture and humidity
generated by the dishwasher and are vented to both ends of the
dishwasher. The fans serve to ventilate only the dishwashing
area of the kitchens and ensure that the dishwashers operate
efficiently. The fans are attached to the roofs of the
facilities using bolts and are connected to duct work
specifically designed for and used only with those fans.
The dishwasher condensate return units consist of water
piping which provides an emergency source of hot water for the
dishwashers. The piping is attached to the building and runs
from a dishwasher to a boiler and back to the dishwasher. It is
separate and apart from the building plumbing and is used
exclusively to connect the dishwashers with the boilers. Removal
17
(...continued)
in petitioners' hospitals are similar to those in issue in
Morrison, Inc. v. Commissioner, supra.
- 26 -
of the condensate return unit piping would not affect the
hospital's main water piping and sanitary drainage.
The kitchen duct work is placed in the walls and ceilings
during construction. The duct work is fastened to the building
structure with steel hangers. It is not movable without removal
of building walls and ceilings. Portions may be removable but
that partial removal would render the remaining sections
unusable. The sheet metal duct work, exhaust hoods, exhaust and
supply fans, and condensate return units are fixed to the
building with screws and bolts. The frames are bolted and
welded. Much of the installation is through walls, ceilings, and
roofs, and specific openings are made in the structure for those
items.
12. Patient Corridor Handrails (Property Unit 3190)
Patient corridor handrails18 are strips of hard plastic,
about 1-3/4-inches at the top and 6-inches wide, which are
attached to the walls in certain areas of petitioners' hospitals
using bolts and clip brackets. The patient corridor handrails
are placed approximately 32-inches above the hospital floors and
extend 3-1/2-inches from the wall surface. They are installed in
18
The patient corridor handrails in issue do not include
handrails located in hospital stairwells or those required by
elevation changes, nor do they include bumper guards, which are
located in all hallways and corridors and used to protect the
walls of petitioners' buildings.
- 27 -
patient corridors of the hospitals to assist in the
rehabilitation of petitioners' patients.
Patient corridor handrails can be removed from the walls of
the hospitals. After removal, the handrails can be replaced or
relocated within the hospital.
Local fire or building codes do not require patient corridor
handrails.
13. Overbed Lights and Related Electrical Connections
(Property Unit 4050)
The overbed lights are 4-tube, 4-foot fluorescent lighting
fixtures installed in a standard opening in the acoustical
ceiling grid and are positioned directly over the patient beds in
each patient room. They are similar in appearance to general
lighting fixtures. The lights are controlled by switches located
on the headwall units above the patient bed headboards. The
placement of the switches allows the overbed lights to be
activated by someone standing at the patient's bedside and makes
it difficult for a patient to activate the overbed light while
lying in bed.
The overbed lights are designed to be used and are used to
provide a light source during the examination of patients by
medical staff or physicians. The overbed lights are referred to
as "exam lights" on the hospital blueprints.
The patient rooms are approximately 100 square feet in size.
Other lighting devices in the patient rooms also provide room
- 28 -
illumination.19 For example, each patient room contains a 2-tube
fluorescent light fixture which is attached to the wall just
above each patient bed headboard and which is activated by a pull
cord placed within the patient's reach. Additionally, each
patient room contains a fluorescent light fixture placed over the
vanity cabinet located in the patient room area and a night light
that provides exit lighting during the night. Furthermore, each
patient room contains one large double-pane window which
illuminates the patient rooms during the daylight hours. Use of
the overbed lights may be uncomfortable for some patients because
of the brightness of the lights and of the placement of the
lights directly over a patient's bed.
The electrical conduit, wiring, and junction boxes relating
to the overbed lights are used only with those lights, but, if
necessary, they could be adapted for other uses. The electrical
connections relating to the overbed lights are necessary for the
operation of the overbed lights.
14. Accordion Doors/Partitions (Property Unit 3240)
The accordion doors/partitions (partitions) in the subject
category consist of two different types of accordion-style room
dividers. Both types are approximately 8- to 10-foot high and,
when expanded, are used to subdivide the hospital cafeterias and
conference rooms into smaller rooms. They are attached to the
19
Those lighting devices are not in issue.
- 29 -
hospital walls and are expanded and contracted by manually
pulling them along tracks attached to the ceilings. The
partitions are suspended from those tracks. The tracks are
mounted on 2-inch by 4-inch or 2-inch by 6-inch blocking, which
is attached to the ceilings of the hospital buildings and
supported from above by angled steel arms. The partitions do not
bear any structural loads. The partition located in the
cafeteria contains a door which allows passage through the
subdivided rooms when the accordion is fully extended.
The partitions located in the hospital conference rooms
represent 44 percent of the total cost bases of the partitions in
issue. The partitions located in the hospital cafeterias
represent the remaining 56 percent of the total cost bases of the
partitions in issue.
The partition originally placed in a West Houston Medical
Center conference room has been removed and is currently in
storage. Removal of the partition has not affected the essential
structure of the West Houston Medical Center. The supporting
steel and wood for that partition still is attached to the
structural frame at the site of the original installation,
covered by the acoustical ceiling.
15. Bathroom Accessories and Partitions (Property Unit
2360) and Plastic Mirrors (Property Unit 2385)
Petitioners' hospital facilities contain a large number of
bathrooms in addition to employee bathrooms and public
- 30 -
bathrooms.20 The bathroom accessories in issue consist of the
following items located in patient bathrooms of petitioners'
hospitals: Paper towel dispensers, soap dispensers, mirrors,
towel racks, grab bars, toilet paper holders, bathrobe hooks,
shower curtain rods, and toiletry shelves. Petitioners' staff
and employees do not use the patient bathrooms, except as
necessary to provide health care services to the patients.
Toilet accessories such as grab bars require support by
double studding behind the walls. The bathroom accessories are
attached to either the walls or the doors of the patient
bathrooms using screws. They can be removed from the walls of
the bathrooms by removing the screws and backplates attaching
them to the walls. Removal of those items does not damage either
the items or the walls. Removal of the items is not a time-
consuming or difficult process, and one of the items typically
could be removed from a wall within 1 minute. If removed, the
items could be reused elsewhere if the necessary blocking is in
place. The plastic mirrors included in Property Unit 2385 are
in all material respects identical to the mirrors located in the
patient rooms which are included in Property Unit 2360.
20
Petitioners concede that the bathroom accessories in
Property Unit 2360 located in non-patient bathrooms (i.e., the
employee and public bathrooms) relate to the operation or
maintenance of a building and thus constitute structural
components of the buildings. Seventy-five percent of the total
cost of the bathroom accessories included in Property Unit 2360
is attributable to the bathroom accessories located in patient
bathrooms.
- 31 -
16. Acoustical Tile Ceilings (Property Unit 2260)
The acoustical tile ceilings (acoustical ceilings) consist
of metal grid systems, typically with a 2-foot by 2-foot or 2-
foot by 4-foot opening, and squares of acoustical tile that are
laid into the openings of the grids. The grids are installed in
select areas of petitioners' hospital facilities and are hung by
wires parallel to the structural frames of the hospital
buildings, approximately 8- to 12-feet above the concrete floors.
The wires are attached to the structural frames of the hospital
buildings using eye bolts. The grids are attached to the
hospital walls using nails or screws. Light fixtures, speakers,
air conditioning vents, and sprinkler heads are placed in
openings of the grids or through openings cut in the tiles.
The acoustical ceilings are movable and have been moved,
reconfigured, and reused by petitioners in at least one of
petitioners' representative facilities. Acoustical ceilings hide
unsightly plumbing and piping, conduit, wiring, and air
conditioning ducts which are installed between the structural
frame above and the ceiling. The acoustical ceilings also
enhance the cleanliness of petitioners' hospitals by preventing
dirt and dust from falling from the pipes and duct work located
between the acoustical ceilings and the structural ceilings of
the hospitals into the areas below. Acoustical tiles
additionally provide a sound deadening material, which reduces
noise. They also serve a decorative function.
- 32 -
The acoustical ceilings utilized by petitioners are typical
of the ceilings used in many commercial buildings. Painted
gypsum board is used for ceilings in the critical areas of the
hospitals, such as the operating, trauma, and medical areas.
Hospital accreditation commissions require hospitals to have
ceilings in order to operate as hospitals.
17. Steam Boilers and Related Accessories (Property Unit
3193)
The steam boiler systems in Property Unit 3193 are shop-
assembled, high-pressure, steam-operated boilers and related
accessories. The steam boilers produce steam that is used to
provide heat for petitioners' hospitals and that is distributed
to specific items of hospital equipment, such as the air make-up
units, hot water heaters, kitchen equipment, operating room
humidifiers, and central sterilization equipment.
The boilers and related accessories are bolted to structural
steel frames, which are encased in a concrete slab, raised floor.
Bolts, embedded into the concrete, are used both to level the
boilers and to secure the installation. The boiler stacks are
attached to the structural roof and extend through the roof to an
elevation which facilitates the dispersion of fumes.
The boilers and related accessories are placed in the
mechanical room and are interconnected with the piping used to
transmit the high temperature water and steam. The entire system
is integrated into the building mechanical system.
- 33 -
Boilers are not easily removed. The installation and/or
removal of a boiler would require a skilled mechanical
subcontractor.
OPINION
During taxable years ended 1985 through 1988, petitioners
constructed a number of hospital facilities, which they used in
their trade or business. For purposes of our decision as to
petitioners' entitlement to depreciation deductions relating to
those facilities for those taxable years, the parties do not
agree on the appropriate recovery classes or recovery periods for
the disputed property items21 contained in the facilities.
Resolution of that issue entails our decision as to whether the
disputed property items constitute section 1245 class property or
section 1250 class property. The parties have stipulated that if
a disputed property item constitutes section 1245 class property,
it is depreciable over a 5-year recovery period, but if the
disputed property item constitutes section 1250 class property,
it is depreciable over an 18-, 19-, or 31.5-year recovery period
(depending on when the item was placed in service).22
21
The parties have agreed on the classification of a number of
property items relating to the constructed facilities, but they
are unable to agree as to the disputed property items described
supra.
22
The recovery period for real property placed in service
after March 15, 1984, but before May 9, 1985, generally is 18
years. Deficit Reduction Act of 1984 (DRA-1984), Pub. L. 98-369,
sec. 111, 98 Stat. 634; Simplification of Imputed Interest Rules
(continued...)
- 34 -
Accordingly, we must decide whether the tests developed under
prior law for purposes of the investment tax credit must be used
in deciding the appropriate recovery classes (for tax years ended
1985 and 1986) or appropriate recovery periods (for tax years
ended 1987 and 1988) for the disputed property items that
petitioners placed in service during those years and, if so,
whether the respective properties constitute section 1245 class
property or section 1250 class property pursuant to those tests.
Petitioners contend that the disputed property items
constitute section 1245 class property and that those items are
depreciable over 5-year periods. Respondent contends that the
disputed property items are section 1250 class property because
they are structural components of the buildings to which they
relate, and, thus, they are depreciable over the same recovery
period as the buildings.
22
(...continued)
(SIIR), Pub. L. 99-121, secs. 103, 105(a), 99 Stat. 509-511
(1985). The recovery for real property placed in service after
May 8, 1985, but before Dec. 31, 1986, generally is 19 years.
SIIR, secs. 103, 105(a); Tax Reform Act of 1986 (TRA-1986), Pub.
L. 99-514, secs. 201, 203, 100 Stat. 2122-2123, 2143. The
recovery period for nonresidential real property placed in
service after Dec. 31, 1986, but before May 12, 1993, generally
is 31.5 years. TRA-86, secs. 201, 203; Omnibus Budget
Reconciliation Act of 1993 (OBRA-1993), Pub. L. 103-66, sec.
13151, 107 Stat. 448. For convenience, we refer to property
placed in service between Jan. 1, 1985, and Dec. 31, 1986,
generally as 19-year property.
- 35 -
In General
Section 167 prescribes general rules governing the
depreciation deduction, which provides a reasonable allowance for
the exhaustion, wear and tear of property used in a trade or
business or held for the production of income. Section 168,
added to the Internal Revenue Code (Code) by the Economic
Recovery Tax Act of 1981 (ERTA), Pub. L. 97-34, 95 Stat. 172,
describes a specific depreciation system, entitled "Accelerated
Cost Recovery System" (ACRS), applicable generally for tangible,
depreciable property placed in service after December 31, 1980.
ERTA, secs. 201(a), 209(a), 95 Stat. 226. During 1986, Congress
replaced ACRS with a modified accelerated cost recovery system
(MACRS), effective generally for tangible, depreciable property
placed in service after December 31, 1986. Tax Reform Act of
1986 (TRA-86), Pub. L. 99-514, secs. 201, 203, 100 Stat. 2122-
2123, 2143. Accordingly, the disputed property items placed in
service during 1985 and 1986 are subject to the ACRS rules, and
the disputed property items placed in service after 1986 are
subject to the MACRS rules.
ACRS
Congress enacted ACRS to stimulate the economy by allowing
greater depreciation deductions over shorter depreciation periods
and to simplify the depreciation rules. Sprint Corp. v.
Commissioner, 108 T.C. 383 (1997); Simon v. Commissioner, 103
T.C. 247, 255 (1994), affd. 68 F.3d 41 (2d Cir. 1995); Liddle v.
- 36 -
Commissioner, 103 T.C. 285, 289, 290 (1994), affd. 65 F.3d 329(3d Cir. 1995); see also Collins Music Co. v. United States, 21
F.3d 1330, 1332 (4th Cir. 1994); S. Rept. 97-144, at 47 (1981),
1981-2 C.B. 412, 425. ACRS permits a depreciation deduction for
recovery property over a predetermined recovery period by
applying a statutory percentage to its cost. Sec. 168(b); Schrum
v. Commissioner, T.C. Memo. 1993-124, affd. in part and vacated
and remanded in part on another issue 33 F.3d 426 (4th Cir.
1994).
Recovery property is defined generally as "tangible property
of a character subject to the allowance for depreciation--(A)
used in a trade or business, or (B) held for the production of
income." Sec. 168(c)(1). Recovery property is assigned to one
of the following classes of property: 3-year property, 5-year
property, 10-year property, 19-year real property, 15-year public
utility property, or low-income housing. Sec. 168(c)(2). A
special rule applies for theme parks. Sec. 168(c)(2)(G).
Five-year property includes section 1245 class property
which is not 3-year property, 10-year property, or 15-year public
utility property. Sec. 168(c)(2)(B). Five-year property, thus,
includes section 1245 class property with no assigned class life.
Sec. 168(c)(2)(B); Collins Music Co. v. United States, supra at
1333. Nineteen-year real property "means section 1250 class
property which--(i) does not have a present class life of 12.5
- 37 -
years or less, and (ii) is not low-income housing." Sec.
168(c)(2)(D).
The present class life of a property item is "the class life
(if any) which would be applicable with respect to any property
as of January 1, 1981, under subsection (m) of section 167
(determined without regard to paragraph (4) thereof and as if the
taxpayer had made an election under such subsection)."23 Sec.
168(g)(2). Additionally, respondent may prescribe a present
class life that reasonably reflects the anticipated useful life
of the property for any property that did not have a present
class life as of January 1, 1981. Sec. 168(g)(2). Class life
refers to the class life of property assigned by respondent that
reasonably reflects the anticipated useful life of that class of
property to a particular industry or other group. Sec. 167(m);
23
Sec. 167(m) was repealed as an obsolete provision by the
Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508, sec.
11812, 104 Stat. 1389-534. Prior to its repeal, sec. 167(m)
provided as follows:
SEC. 167(m) Class Lives.--
(1) In General.--In the case of a taxpayer who has
made an election under this subsection for the taxable year,
the term "reasonable allowance" as used in subsection (a)
means (with respect to property which is placed in service
during the taxable year and which is included in any class
for which a class life has been prescribed) only an
allowance based on the class life prescribed by the
Secretary which reasonably reflects the anticipated useful
life of that class of property to the industry or other
group. The allowance so prescribed may (under regulations
prescribed by the Secretary) permit a variance from any
class life by not more than 20 percent (rounded to the
nearest half year) of such life.
- 38 -
see sec. 1.167(a)-11, Income Tax Regs. Accordingly, ACRS
incorporates by reference the Asset Depreciation Range (ADR)24
classifications. Sec. 168(g)(2); Walgreen Co. v. Commissioner,
68 F.3d 1006, 1008 (7th Cir. 1995), revg. and remanding on
another issue 103 T.C. 582 (1994). ACRS reduces the number of
property classes from around 125 under the ADR system to six
(five as originally enacted). Sec. 168(c)(2); Sprint Corp. v.
Commissioner, supra.
In several revenue procedures, respondent had prescribed
asset guideline classes, asset guideline periods (class lives)
and ranges, and annual asset guideline repair allowance
percentages for assets used in business, manufacturing, and other
activities. E.g., Rev. Proc. 87-56, 1987-2 C.B. 674; Rev. Proc.
24
Prior to ERTA, the principal method used to assign useful
lives for personal property was the ADR and class life system,
which was effective generally for assets placed in service after
1970 and before 1981. Walgreen Co. v. Commissioner, 103 T.C.
582, 586-588 (1994), revd. and remanded on another issue 68 F.3d
1006 (7th Cir. 1995); Simon v. Commissioner, 103 T.C. 247, 254-
255 (1994), affd. 68 F.3d 41 (2d Cir. 1995); Clinger v.
Commissioner, T.C. Memo. 1990-459; see also sec. 1.167(a)-(11),
Income Tax Regs. Pursuant to that system, assets were grouped
into approximately 125 different asset guideline classes and a
guideline life was assigned to each class. A range of years,
i.e., the ADR, was then provided for each class of personal
property. The taxpayer could use a useful life of up to 20
percent longer or 20 percent shorter than the guideline life
prescribed by respondent for particular classes of depreciable
property. For each asset account in the class, the taxpayer
selected either a class life or an ADR that was used as the
useful life for computing depreciation. Sprint Corp. v.
Commissioner, 108 T.C. 384 (1997); Walgreen Co. v. Commissioner,
supra; Simon v. Commissioner, supra; Clinger v. Commissioner,
supra.
- 39 -
83-35, 1983-1 C.B. 745. The revenue procedures provide ADR
classes for specified depreciable assets generally used in all
business activities, except as noted, as well as for depreciable
assets used in certain businesses. Rev. Proc. 83-35, supra, is
applicable for assets placed in service during years ended 1985
and 1986. The present class life is the asset guideline period
(i.e., the midpoint class life) established for the particular
class. Rev. Proc. 83-35, sec. 101, 1983-1 C.B. at 745.
The component method of depreciation is not permitted under
ACRS. Sec. 168(f)(1).25 The component method of depreciation is
25
Sec. 168(f) provides in pertinent part as follows:
SEC. 168(f) Special rules for application of this section.
--For purposes of this section--
(1) Components of section 1250 class property.--
(A) In general.--Except as otherwise provided in
this paragraph--
(i) the deduction allowable under subsection
(a) with respect to any component (which is
section 1250 class property) of a building shall
be computed in the same manner as the deduction
allowable with respect to such building, and
(ii) the recovery period for such component
shall begin on the later of--
(I) the date such component is placed in
service, or
(II) the date on which the building is
placed in service.
(B) Transitional rules.
(continued...)
- 40 -
a method of depreciation that "fragments an item of property,
often a building, into its elements (e.g., shell, plumbing, and
wiring) and applies individual useful lives and salvage values to
each such component." Westin, Lexicon of Tax Terminology 127
(1984); see also Shainberg v. Commissioner, 33 T.C. 241 (1959);
sec. 1.167-7, Income Tax Regs.
Accordingly, the parties agree that the disputed property
items placed in service during 1985 and 1986 constitute 5-year
property, as petitioners contend, only if the items constitute
section 1245 class property, and do not constitute structural
components of section 1250 class property, as respondent contends
they do.
MACRS
MACRS provides that the "depreciation deduction provided by
section 167(a) for any tangible property shall be determined by
using--(1) the applicable depreciation method, (2) the applicable
recovery period, and (3) the applicable convention." Sec.
168(a). For purposes of the general depreciation system, which
is involved in the instant case, MACRS generally classifies
25
(...continued)
* * * * * * *
(C) Exception for substantial improvements.--
(i) In general. For purposes of this
paragraph, a substantial improvement shall be
treated as a separate building.
- 41 -
eligible personal property and certain real property as 3-year
property, 5-year property, 7-year property, 10-year property, 15-
year property, or 20-year property, and assigns that property to
a corresponding recovery period on the basis of the property's
class life. Sec. 168(c), (e)(1), (e)(3). MACRS generally
classifies section 1250 real property as residential rental
property (which is not involved in the instant case) or
nonresidential real property,26 which are assigned to a 27.5-year
recovery period or a 31.5-year recovery period,27 respectively.
Sec. 168(c), (e)(2).
Section 168(i)(1) provides that the term "class life" means
"the class life (if any) which would be applicable with respect
to any property as of January 1, 1986, under subsection (m) of
section 167". That class life generally is the midpoint class
life for the asset guideline class to which the property was
assigned as of January 1, 1986, pursuant to Rev. Proc. 83-35,
26
Sec. 168(e)(2)(B) defines nonresidential real property as
follows:
(B) Nonresidential real property.--The term "nonresidential
real property" means section 1250 property which is not--
(i) residential rental property, or
(ii) property with a class life of less than 27.5
years.
27
OBRA-1993, sec. 13151, 107 Stat. 448, extended to 39 years
the recovery period for nonresidential real property placed in
service after May 12, 1993.
- 42 -
1983-1 C.B. 745.28 Rev. Proc. 87-56, sec. 2.20, 1987-2 C.B. at
674. Section 168(i)(1)(B) provides that, except in the case of
residential rental property or nonresidential real property,
respondent may designate a class life for any property which does
not have a prescribed class life as of January 1, 1986, or,
within restrictions, may modify the class life of property.29
See sec. 168(i)(1)(D). Additionally, section 168(e) assigns
recovery periods to certain tangible, depreciable property
regardless of its class life. Sec. 168(e)(3). Rev. Proc. 87-56,
section 5, 1987-2 C.B. 674, as clarified and modified by Rev.
Proc. 88-22, 1988-1 C.B. 785, prescribes class lives and recovery
periods applicable for years ended 1987 and 1988.
MACRS repealed ACRS section 168(f)(1), which related
specifically to components of section 1250 class property.
Section 168(i)(6),30 however, provides that improvements made to
28
With the exception of telephone central office equipment for
which a class life was delineated in Rev. Proc. 82-67, 1982-2
C.B. 853, the class lives for property as of Jan. 1, 1986, for
property that had assigned class lives, remained the same as
their class lives as of Jan. 1, 1981. See Collins Music Co. v.
United States, 21 F.3d 1330, 1333-1334 (4th Cir. 1994); Rev.
Proc. 83-35, sec. 1.01, 1983-1 C.B. 745, 745.
29
Congress repealed respondent's authority to prescribe or
modify class lives in sec. 6253 of the Technical and
Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat.
3753.
30
Sec. 168(i)(6) provides as follows:
(6) Treatments of additions or improvements to
property.--In the case of any addition to (or improvement
(continued...)
- 43 -
real property are depreciated using the same recovery period
applicable to the underlying property as if the underlying
property were placed in service at the time the improvements were
made. Accordingly, MACRS continues the prohibition against the
use of the component method of depreciation. S. Rept. 99-313, at
105 (1986), 1986-3 C.B. (Vol. 3) 105.
Congress did not assign a specific class life to the
disputed property items placed in service during 1986 and 1987.
See sec. 168(e)(3). Accordingly, the parties agree that the
disputed property items constitute 5-year property, as
petitioners contend, only if the items have a class life of more
than 4 years but less than 10 years pursuant to Rev. Proc. 87-56,
as clarified and modified by Rev. Proc. 88-22, sec. 168(c),
(e)(1), and the disputed property items do not constitute
30
(...continued)
of) any property--
(A) any deduction under subsection (a) for such
addition or improvement shall be computed in the same
manner as the deduction of such property would be
computed if such property had been placed in service at
the same time as such addition or improvement, and
(B) the applicable recovery period for such
addition or improvement shall begin on the later of--
(i) the date on which such addition (or
improvement) is placed in service, or
(ii) the date on which the property with
respect to which such addition (or improvement)
was made is placed in service.
- 44 -
structural components of nonresidential real property, as
respondent contends they do.
The Meaning of Section 1245 Class Property Under ACRS and MACRS.
Respondent does not dispute for purposes of the instant case
that petitioners' business is described in Asset Guideline Class
57.0 (Class 57.0). Rev. Proc. 83-35, 1983-1 C.B. at 762, and
Rev. Proc. 87-56, 1987-2 C.B. at 686, describe Class 57.0 as
follows: "Distributive Trades and Services: Includes assets used
in wholesale and retail trade, and personal and professional
services. Includes section 1245 assets used in marketing
petroleum and petroleum products". Both revenue procedures
prescribe a 9-year class life for assets in Class 57.0. Rev.
Proc. 83-85, supra; Rev. Proc. 87-56, supra. ACRS and MACRS both
provide that property with a 9-year class life is depreciable
over a 5-year period. Sec. 168(c)(2)(B) (1985 and 1986); sec.
168(c), (e)(1) (1986 and 1987). Consequently, unless the
disputed property items constitute section 1250 class property,
they are depreciable over 5-year periods because petitioners'
businesses fall within the category "personal and professional
services".
Petitioners contend that the disputed property items
constitute section 1245 class property pursuant to the Code,
relevant legislative history, relevant income tax regulations,
respondent's long-standing rulings, and prior decisions of this
Court and, therefore, are properly depreciable over 5-year
- 45 -
periods. Petitioners maintain that the question of whether
property constitutes section 1245 or section 1250 property
frequently was presented to respondent and to the courts in the
context of whether property constituted tangible personal
property for purposes of qualifying for ITC and that a similar
analysis is appropriate for purposes of ACRS and MACRS.
Respondent has raised a number of arguments in support of
the position that the disputed property items constitute section
1250 class property. Respondent's principal argument is that
using a different recovery period for the disputed property items
than for the buildings to which they relate in effect results in
component depreciation, which method is no longer permitted under
ACRS and MACRS. Respondent argues that the cases on which
petitioners primarily rely are not applicable to the instant case
because those cases involve tax years prior to 1981, when
component depreciation was permissible, and they deal with ITC.
Respondent asserts that the judicially developed ITC tests have
limited application in determining what constitutes a structural
component for purposes of applying ACRS and MACRS in light of the
elimination of the component method of accounting. Respondent
maintains that the disputed property items must be depreciated
over the same recovery period as the structure to which they
relate. Respondent's position raises an issue of first
impression.
- 46 -
To resolve that issue, we look to the language of the
statute. Because the relevant ACRS and MACRS provisions differ,
we discuss separately our conclusion that, in prohibiting
component depreciation, Congress did not intend to eliminate from
5-year property those disputed property items which would satisfy
the definition of tangible personal property pursuant to section
1245(a)(3)(A) prior to the enactment of ACRS or MACRS.
ACRS
As we discussed supra, to be classified as 5-year property
the disputed property items must constitute section 1245 class
property. Sec. 168(c)(2)(B).31 Section 1245 class property
consists of "tangible property described in section 1245(a)(3)
other than subparagraphs (C) and (D)."32 Sec. 168(g)(3).33 On
31
For taxable years ended 1984 and 1985, sec. 168(c)(2)(B)
provides as follows:
(B) 5-year property.--The term "5-year property" means
recovery property which is section 1245 class property and
which is not 3-year property, 10-year property, or 15-year
public utility property.
32
Sec. 1245(a)(3) provides as follows:
(3) Section 1245 Property.--For purposes of this
section, the term "section 1245 property" means any
property which is or has been property of a character
subject to the allowance for depreciation provided in
section 167 (or subject to the allowance of amortization
provided in section 185) and is either--
(A) personal property,
(B) other property (not including a building or
its structural components) but only if such other
(continued...)
- 47 -
the other hand, to constitute 19-year real property, the property
must be section 1250 class property. Section 1250 class property
32
(...continued)
property is tangible and has an adjusted basis in which
there are reflected adjustments described in paragraph (2)
for a period in which such property (or other property)--
(i) was used as an integral part of
manufacturing, production, or extraction or of
furnishing transportation, communications,
electrical energy, gas, water, or sewage disposal
services, or
(ii) constituted a research facility used in
connection with any of the activities referred to
in clause (i), or
(iii) constituted a facility used in
connection with any of the activities referred to
in clause (i) for the bulk storage of fungible
commodities (including commodities in a liquid or
gaseous state),
(C) an elevator or an escalator,
(D) so much of any real property (other than any
property described in subparagraph (B)) which has an
adjusted basis in which there are reflected adjustments
for amortization under section 169, 179, 185, 188, 190,
193, or 194,
(E) a single purpose agricultural or horticultural
structure (as defined in section 48(p)), or
(F) a storage facility (not including a building
or its structural components) used in connection with
the distribution of petroleum or any primary product of
petroleum.
33
For taxable years ended 1984 and 1985, sec. 168(g)(3)
provides as follows:
The term "section 1245 class property" means tangible
property described in section 1245(a)(3) other than
subparagraphs (C) and (D).
- 48 -
embodies "property described in section 1250(c)34 and * * * in
section 1245(a)(3)(C)." Sec. 168(g)(4).35
Petitioners are not engaged in an activity described in
section 1245(a)(3)(B). Additionally, the disputed property items
are not described in section 1245(a)(3)(E) or (F). Accordingly,
the disputed property items constitute section 1245 class
property only if they are personal property as defined in section
1245(a)(3)(A). See also sec. 1.1245-3(a), Income Tax Regs.
Section 1.1245-3(b)(1), Income Tax Regs., defines personal
property as "(1) Tangible personal property (as defined in
paragraph (c) of § 1.48-1, relating to the definition of 'section
38 property' for purposes of the investment credit)".
Accordingly, ACRS incorporates within the meaning of section 1245
class property tangible personal property defined in section
1.48-1(c), Income Tax Regs.36
34
Sec. 1250(c) provides as follows:
(c) Section 1250 Property. For purposes of this section,
the term "section 1250 property" means any real property
(other than section 1245 property, as defined in section
1245(a)(3)) which is or has been property of a character
subject to the allowance for depreciation provided in
section 167.
35
For taxable years ended 1984 and 1985, sec. 168(g)(4)
provides as follows:
(4) Section 1250 class property. The term "section 1250
class property" means property described in section 1250(c)
and property described in section 1245(a)(3)(C).
36
Sec. 1.48-1(c), Income Tax Regs., provides as follows:
(continued...)
- 49 -
Nineteen-year real property consists of section 1250 class
property with a present class life of more than 12.5 years,
except for low-income housing as defined in section 168(c)(2)(F).
Sec. 168(c)(2)(D). Section 1250 class property is property
described in section 1250(c) and in section 1245(a)(3)(C). Sec.
36
(...continued)
(c) Definition of tangible personal property. If property
is tangible personal property it may qualify as section 38
property irrespective of whether it is used as an integral
part of an activity (or constitutes a research or storage
facility used in connection with such activity) specified in
paragraph (a) of this section. Local law shall not be
controlling for purposes of determining whether property is
or is not "tangible" or "personal". Thus, the fact that
under local law property is held to be personal property or
tangible property shall not be controlling. Conversely,
property may be personal property for purposes of the
investment credit even though under local law the property
is considered to be a fixture and therefore real property.
For purposes of this section, the term "tangible personal
property" means any tangible property except land and
improvements thereto, such as buildings or other inherently
permanent structures (including items which are structural
components of such buildings or structures). Thus,
buildings, swimming pools, paved parking areas, wharves and
docks, bridges, and fences are not tangible personal
property. Tangible personal property includes all property
(other than structural components) which is contained in or
attached to a building. Thus, such property as production
machinery, printing presses, transportation and office
equipment, refrigerators, grocery counters, testing
equipment, display racks and shelves, and neon and other
signs, which is contained in or attached to a building
constitutes tangible personal property for purposes of the
credit allowed by section 38. Further, all property which
is in the nature of machinery (other than structural
components of a building or other inherently permanent
structure) shall be considered tangible personal property
even though located outside a building. Thus, for example,
a gasoline pump, hydraulic car lift, or automatic vending
machine, although annexed to the ground, shall be considered
tangible personal property.
- 50 -
168(g)(4). Section 1250(c) defines section 1250 property to mean
"any real property (other than section 1245 property, as defined
in section 1245(a)(3))". Section 1245(a)(3)(C) includes
elevators and escalators within the definition of section 1245
property.
Section 1.1250-1(e)(3)(i), Income Tax Regs., defines real
property to include the structural components of a building
within the meaning of section 1.1245-3(c), Income Tax Regs.,
which provides in pertinent part that "the terms 'building' and
'structural components' shall have the meanings assigned to those
terms in paragraph (e) of § 1.48-1."37
37
Sec. 1.48-1(e)(2) provides in pertinent part as follows:
(2) The term "structural components" includes such parts of
a building as walls, partitions, floors, and ceilings, as
well as any permanent coverings therefor such as paneling or
tiling; windows and doors; all components (whether in, on,
or adjacent to the building) of a central air conditioning
or heating system, including motors, compressors, pipes and
ducts; plumbing and plumbing fixtures, such as sinks and
bathtubs; electric wiring and lighting fixtures; chimneys;
stairs, escalators, and elevators, including all components
thereof; sprinkler systems; fire escapes; and other
components relating to the operation or maintenance of a
building. However, the term "structural components" does
not include machinery the sole justification for the
installation of which is the fact that such machinery is
required to meet temperature or humidity requirements which
are essential for the operation of other machinery or the
processing of materials or foodstuffs. Machinery may meet
the "sole justification" test provided by the preceding
sentence even though it incidentally provides for the
comfort of employees, or serves, to an insubstantial degree,
areas where such temperature or humidity requirements are
not essential. * * *
- 51 -
The foregoing statutory and regulatory provisions support a
conclusion that Congress intended that the same tests be used to
ascertain whether property constitutes section 1245 class
property or section 1250 class property for purposes of ACRS as
are applied for purposes of determining whether property
qualifies for ITC. See also Schrum v. Commissioner, 33 F.3d 426,
437 (4th Cir. 1994), affg. in part and vacating and remanding in
part on another issue T.C. Memo. 1993-124, where the Court of
Appeals observed: "That the classes of section 38 property and
section 1245 property are, for present purposes, coextensive, is
confirmed by Treasury Regulation § 1.1245-3(b)(1), which, in
defining section 1245 property, makes several references to
Treasury Regulation § 1.48-1(c)." (Fn ref. omitted.)
Respondent, however, contends that section 168(f)(1),38
which prohibits component depreciation, effectively operates to
change the definition of tangible personal property for purposes
of ACRS to eliminate from section 1245 class property, and to
include in section 1250 class property, any item which is
attached to a building and that has utility beyond its relation
to a particular piece of property, even if under long-standing
precedent the property constitutes personal property for purposes
of section 38 and section 1245. We, however, do not agree.
38
See supra note 25.
- 52 -
Section 168(f)(1) only could apply to property that
constitutes section 1250 class property as that term was
understood at the time Congress enacted ACRS. Neither the
statute nor its legislative history reveals an intent by Congress
to redefine section 1250(c) to include property, which at that
time, was considered under long-standing precedent to constitute
section 1245 property. Had Congress intended that outcome, we
believe Congress would have clearly set forth that intent in the
statute or in its legislative history. To the contrary, the
statutory language supports petitioners' position. Section
168(f)(1)(A)(i) provides that "the deduction allowable under
subsection (a) with respect to any component (which is section
1250 class property) of a building shall be computed in the same
manner as the deduction allowable with respect to such building".
(Emphasis added.) Thus, the statutory provision plainly and only
speaks to section 1250 class property, which section 168(g)(4)
defines as property described in section 1250(c). As discussed
supra, the regulations under section 1250(c) incorporate by
reference section 1.1245-3(c), Income Tax Regs., which
incorporates by reference section 1.48-1(e), Income Tax Regs.
Accordingly, we conclude that the statutory language manifests a
congressional intent to retain the prior law distinction between
components that constitute section 1250 class property and
property items that constitute section 1245 class property.
- 53 -
The legislative history does not reveal a contrary
intention. The legislative history relating to section
168(f)(1)(A) does not focus on the definition of section 1250
class property or on the definition of structural components
contained in section 1.48-1(e), Income Tax Regs. See H. Rept.
97-201, at 67-68, 84 (1981); S. Rept. 97-144 (1981), 1981-2 C.B.
412, 428. Moreover, the General Explanation of ERTA prepared by
the staff of the Joint Committee on Taxation states as follows:
The recovery period and method the taxpayer selects
must be used for the building as a whole, including all
structural components that are real property (e.g., wiring,
plumbing, etc.). Component depreciation no longer may be
used. The distinction between a structural component of a
building, which is section 1250 property, and an item of
property that is section 1245 property remains the same as
under prior law. * * * [Staff of the Joint Comm. on
Taxation, General Explanation of the Economic Recovery Tax
Act of 1981, at 85 (J. Comm. Print 1981). Emphasis added.]
Additionally, see Staff of the Joint Comm. on Taxation,
General Explanation of the Tax Reform Act of 1986, at 90 (J.
Comm. Print 1987), summarizing the prohibition against the
component method of depreciation under ACRS as follows:
"Component cost recovery was not permitted under ACRS. Thus, the
same recovery period and method had to be used for a building as
a whole, including all structural components."; see also H. Rept.
99-426, at 138 (1985), 1986-3 C.B. (Vol. 2) 138; S. Rept. 99-313,
99th Cong., 2d Sess. 88 (1986), 1986-3 C.B. (Vol. 3) 88.
We note further that our understanding of the statutory
provision comports with the construction given that provision in
- 54 -
the report relating to the Small Business Job Protection Act of
1996, Pub. L. 104-188, 110 Stat. 1755,39 wherein the Senate
Finance Committee, in explaining present law relating to
depreciation of leasehold improvements, states as follows:
If the improvement is characterized as tangible
personal property, ACRS depreciation is calculated using the
shorter recovery periods and accelerated methods applicable
to such property. The determination of whether certain
improvements are characterized as tangible personal property
or as nonresidential real property often depends on whether
or not the improvements constitute a "structural component"
of a building (as defined by Treas. Reg. sec. 1.48-1(e)(1)).
See, for example, Metro Natl. Corp. [v. Commissioner], 52
TCM 1440 (1987) [T.C. Memo. 1987-38]; King Radio Corp. [v.
United States], 486 F.2d 1091 (10th Cir. 1973);
Mallinckrodt, Inc. [v. Commissioner], 778 F.2d 402 (8th Cir.
1985) [affg. per curiam T.C. Memo. 1984-532] (with respect
various leasehold improvements). [S. Rept. 104-281, at 16
n.5 (1996).]
We additionally note that for purposes of ascertaining ACRS
recovery periods section 1245 class property has the same
definition as personal property described in section 1.48-1(c),
Income Tax Regs., which comports with respondent's own
interpretation of section 168(f) promulgated in proposed
regulations under section 168 issued during 1984.40 See 49 Fed.
39We recognize that it is well settled that the view of a
later Congress as to the construction of a statute or a
regulation adopted is not entitled to great weight. E.g., CSI
Hydrostatic Testers, Inc. v. Commissioner, 103 T.C. 398, 415
(1994), affd. 62 F.3d 136 (5th Cir. 1995); Mars, Inc. v.
Commissioner, 88 T.C. 428, 435 (1987).
40
The proposed regulations have not been amended to reflect
changes to sec. 168 made by the TRA-1986 and subsequent
legislation. No final or temporary regulations under sec. 168
relating to the issues in the instant opinion have been issued.
(continued...)
- 55 -
Reg. 5940-5971 (Feb. 16, 1984). Section 1.168-2(e), Proposed
Income Tax Regs., 49 Fed. Reg. 5946 (Feb. 16, 1984), provides in
pertinent part as follows "((e) Components and improvements--(1)
Component cost recovery not permitted. In general, the
unadjusted basis of structural components (as defined in § 1.48-
1(e)(2)) of a building must be recovered as a whole. Thus, the
same recovery period and method must be used for all structural
components, and such components must be recovered as constituent
parts of the building of which they are a part. * * *"
[Emphasis added.])
Accordingly, we conclude that the precedent that has been
developed to ascertain whether property constitutes eligible
section 38 property for purposes of ITC is equally applicable to
ascertain whether property constitutes section 1245 class
property for purposes of ACRS. See also Schrum v. Commissioner,
T.C. Memo. 1993-124 (to the extent that property does not qualify
as eligible section 38 property under section 48, the property
cannot constitute section 1245 class property.)
40
(...continued)
We recognize that the proposed regulations "carry no more weight
than a position advanced on brief by the respondent". Zinniel v.
Commissioner, 89 T.C. 357, 369 (1987), quoting F.W. Woolworth Co.
v. Commissioner, 54 T.C. 1233, 1265-1266 (1970).
- 56 -
MACRS
MACRS does not utilize the terms "section 1245 class
property" or "section 1250 class property".41 Rather, MACRS
assigns property to recovery periods on the basis of class lives.
To constitute 5-year property, the disputed property items must
have a class life of more than 4 years but less than 10 years.
Sec. 168(e)(1). To constitute nonresidential real property, the
disputed property items must be section 1250 property with a
class life of more than 27.5 years. Sec. 168(e)(2).
Section 168(i)(12) provides that "The terms 'section 1245
property' and 'section 1250 property' have the meanings given
such terms by sections 1245(a)(3) and 1250(c), respectively." As
we discussed supra, section 1250(c) excludes from the term
"section 1250 property", "section 1245 property, as defined in
section 1245(a)(3)".
From that statutory provision, we conclude that, as with
ACRS, the MACRS statutory language manifests a congressional
intent to retain the prior law distinction between components
41
Although the terms "section 1245 class property" and
"section 1250 class property" are not utilized in MACRS, as will
be discussed in more detail infra, the disputed property items
involved in the instant case for taxable years ended 1986 and
1987 would have constituted either section 1245 class property or
section 1250 class property, as applicable, had ACRS continued to
be in effect for those taxable years. Consequently, for
convenience, we continue to use the terms "section 1245 class
property" and "section 1250 class property", where appropriate,
to refer to property items for which MACRS applies as well as to
the property items for which ACRS applies.
- 57 -
that constitute section 1250 class property and property items
that constitute section 1245 class property. The legislative
history of MACRS does not reveal a contrary intention.
In support of the position that an analysis based on ITC is
inappropriate for cost recovery purposes, respondent relies on
language contained in Grinalds v. Commissioner, T.C. Memo. 1993-
66, that "the 'sole justification' test relates to the investment
tax credit, which has provisions and policies of its own, and it
provides only limited guidance, if any, in interpreting section
168(i)(6), the statute directly involved here." The "sole
justification" test refers to the provision in section 1.48-2(e),
Income Tax Regs., which specifically excludes from the definition
of a structural component "machinery the sole justification for
the installation of which is the fact that such machinery is
required to meet temperature or humidity requirements which are
essential for the operation of other machinery." Sec. 1.48-2(e),
Income Tax Regs. In Grinalds, we did not focus on the definition
of section 1245 class property and section 1250 class property.
Therefore that case is distinguishable and inapplicable to the
issue of whether tangible property constitutes section 1245 class
property or section 1250 class property for purposes of ACRS and
MACRS.
Based on the foregoing, we conclude that the tests developed
to ascertain whether property constituted tangible personal
- 58 -
property for purposes of ITC equally are applicable to decide
whether the property constitutes tangible personal property for
purposes of MACRS. Accordingly, we conclude that, to the extent
a disputed property item would have qualified as tangible
personal property for ITC, that property also will qualify as
tangible personal property for purposes of ACRS and MACRS.
Additional Arguments
Respondent further contends that the tests developed to
decide whether property qualified for ITC are inapplicable to
ascertain ACRS recovery classes or MACRS recovery periods because
ITC and ACRS and MACRS accomplish their capital cost incentives
in a different manner and focus on different factors.
Respondent's arguments in support of that contention are premised
on the position that the ACRS and MACRS depreciation deductions
should be tied to the useful life of the property involved. We
rejected a similar position in Simon v. Commissioner, 103 T.C.
247 (1994), affd. 68 F.3d 41 (2d Cir. 1995), and Liddle v.
Commissioner, 103 T.C. 285 (1994), affd. 65 F.3d 329 (3d Cir.
1995), and we reject it here.
Other arguments raised by respondent in support of the
position that the tests used to ascertain whether property
qualifies as tangible personal property for ITC purposes are not
applicable for purposes of ACRS and MACRS also are without merit,
and we do not address them here.
- 59 -
Respondent contends alternatively that all of the disputed
property items are structural components under an ITC analysis
and, consequently, constitute section 1250 class property. We
now address that alternative position.
Classification of the Disputed Property Items as Section 1245
Class Property or Section 1250 Class Property.
In General
As discussed supra, the classification of disputed property
items as section 1245 class property, depreciable over a 5-year
recovery period, or section 1250 class property, depreciable over
the life of the related structure, depends upon a decision as to
whether the respective items constitute tangible personal
property within the meaning of section 1.48-1(c), Income Tax
Regs., which would be section 1245 class property, or structural
components of the buildings to which they relate within the
meaning of section 1.48-1(e)(2), Income Tax Regs., which would be
section 1250 class property. See also secs. 1.1245-3(b)(1), (c),
1.1250-1(e)(3), Income Tax Regs.
Tangible Personal Property
The regulations define tangible personal property to include
"any tangible property except land and improvements thereto, such
as buildings or other inherently permanent structures (including
items which are structural components of such buildings or
structures)". Sec. 1.48-1(c), Income Tax Regs. Local law does
not control for purposes of determining whether property is or is
- 60 -
not "tangible" or "personal". Id. The term "tangible personal
property" is not intended to be defined narrowly and includes
assets accessory to the operation of a business. Illinois Cereal
Mills, Inc. v. Commissioner, 789 F.2d 1234, 1237 (7th Cir. 1986),
affg. T.C. Memo. 1983-469; Metro Natl. Corp. v. Commissioner,
T.C. Memo. 1987-38; see also S. Rept. 1881, 87th Cong., 2d Sess.
(1962), 1962-3 C.B. 707, 858; Morrison, Inc. v. Commissioner,
T.C. Memo. 1986-129, affd. 891 F.2d 857 (11th Cir. 1990).42
In Whiteco Indus., Inc. v. Commissioner, 65 T.C. 664, 672-
673 (1975), we listed the following factors to consider in
resolving whether property is inherently permanent and, thus, not
tangible personal property within the meaning of section 1.48-
1(c), Income Tax Regs.: (1) Is the property capable of being
42
S. Rept. 1881, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 707,
722, in defining "section 38 property" for purposes of the
investment tax credit, stated in pertinent part as follows:
Except for the exclusions noted below, all tangible
personal property qualifies as section 38 property.
* * * Tangible personal property is not intended to be
defined narrowly here, nor to necessarily follow the
rules of State law. It is intended that assets
accessory to a business such as grocery store counters,
printing presses, individual air-conditioning units,
etc., even though fixtures under local law, are to
qualify for the credit. Similarly, assets of a
mechanical nature, even though located outside a
building, such as gasoline pumps, are to qualify for
the credit. Real property (other than buildings and
structural components) which qualifies as integral
parts of categories referred to above includes such
assets as blast furnaces, oil and gas pipelines,
railroad track and signals, and fences used in
connection with raising cattle.
- 61 -
moved, and has it in fact been moved? (2) Is the property
designed or constructed to remain permanently in place? (3) Are
there circumstances which tend to show the expected or intended
length of affixation, i.e., are there circumstances which show
that the property may or will have to be moved? (4) How
substantial a job is removal of the property and how time-
consuming is it? Is it "readily removable"? (5) How much damage
will the property sustain upon its removal? and (6) What is the
manner of affixation of the property to the land?
Movability itself is not the controlling factor in deciding
whether the property lacks permanence. Kramertown Co. v.
Commissioner, 488 F.2d 728, 731 (5th Cir. 1974), affg. T.C. Memo.
1972-239; see also Consolidated Freightways v. Commissioner, 708
F.2d 1385, 1390 (9th Cir. 1983) (a variety of factors are
considered, including, where possible, the function and design of
the component in issue, the intent of the taxpayer in installing
the component, and the effect of removal of the component on the
building), affg. in part and revg. in part 74 T.C. 768 (1980);
Everhart v. Commissioner, 61 T.C. 328, 331 (1973) (moveability
per se does not determine whether or not property is personal
property); Dixie Manor, Inc. v. United States, 44 AFTR 2d 79-
5442, 79-2 USTC par. 9469 (W.D. Ky. 1979) (fact that walls often
are removed because of a change in design by itself is not
sufficient), affd. without published opinion 652 F.2d 57 (6th
- 62 -
Cir. 1981). The fact that an item is not readily reusable in
another location is evidence supporting the conclusion that it is
to be treated as permanent in its present location.
Mallinckrodt, Inc. v. Commissioner, 778 F.2d 402, 403 (8th Cir.
1985), affg. per curiam T.C. Memo. 1984-532.
Structural Components
Section 1.48-1(e)(2), Income Tax Regs., explains the meaning
of "structural components" by way of example rather than by
definition as follows:
(2) The term "structural components" includes such
parts of a building as walls, partitions, floors, and
ceilings, as well as any permanent coverings therefor such
as panelling or tiling; windows and doors; all components
(whether in, on, or adjacent to the building) of a central
air conditioning or heating system, including motors,
compressors, pipes and ducts; plumbing and plumbing
fixtures, such as sinks and bathtubs; electric wiring and
lighting fixtures; chimneys; stairs, escalators, and
elevators, including all components thereof; sprinkler
systems; fire escapes; and other components relating to the
operation or maintenance of a building. However, the term
"structural components" does not include machinery the sole
justification for the installation of which is the fact that
such machinery is required to meet temperature or humidity
requirements which are essential for the operation of other
machinery or the processing of materials or foodstuffs.
Accordingly, an item constitutes a structural component of a
building if the item relates to the operation and maintenance of
the building. Sec. 1.48-1(e)(2), Income Tax Regs. The "sole
justification" test set forth in section 1.48-1(e)(1), Income Tax
Regs., excludes from the term "structural component" only
machinery that is required to meet the temperature and humidity
- 63 -
requirements of other machinery. See Piggly Wiggly S., Inc. v.
Commissioner, 84 T.C. 739, 750-753 (1985), affd. 803 F.2d 1572(11th Cir. 1986); Texas Instruments, Inc. v. Commissioner, T.C.
Memo. 1992-306; Morrison, Inc. v. Commissioner, supra.
Applying the foregoing general principles, we next consider
the appropriate individual categories for the disputed property
items. Before we address the substantive issues, however, we
must decide an evidentiary matter which was raised at trial.
At trial, petitioners objected to the admission of portions
of the report prepared by respondent's expert, Steve Wilgus (Mr.
Wilgus), which petitioners contend contains legal conclusions.
Respondent contends that the contested materials do not
constitute legal conclusions. We took petitioners' objections
under advisement.
Testimony of a witness qualified by knowledge, skill,
experience, training, or education is admissible whenever that
scientific, technical or other specialized knowledge will assist
the trier of fact to understand the evidence or to decide a fact
in issue. Fed. R. Evid. 702. Testimony that expresses a legal
conclusion and does not assist the trier of fact is not
admissible. See Heflin v. Stewart County, Tenn., 958 F.2d 709,
715-716 (6th Cir. 1992); Davis v. Combustion Engg., Inc., 742
F.2d 916, 919 (6th Cir. 1984); Laureys v. Commissioner, 92 T.C.
101, 126-129 (1989); Weinstein's Federal Evidence, sec.
- 64 -
704.04[2][a], at 704-10-704-11 (2d ed. 1997); see also Fed. R.
Evid. 701, 702; Snap-Drape, Inc. v. Commissioner, 98 F.3d 194,
197-198 (5th Cir. 1996), affg. 105 T.C. 16 (1995); Berry v. City
of Detroit, 25 F.3d 1342, 1353-1354 (6th Cir. 1994); Molecular
Tech. Corp. v. Valentine, 925 F.2d 910, 919 (6th Cir. 1991);
Adalman v. Baker, Watts & Co., 807 F.2d 359, 365-368 (4th Cir.
1986).43
We conclude that Mr. Wilgus' report states legal conclusions
applying law to facts and that those legal conclusion are not
helpful to the Court. Consequently, we disregard them.44
Additionally, in support of their respective positions, the
parties presented expert testimony at trial and in reports
concerning the nature of the disputed property items. Expert
testimony may be in the form of an opinion or in the expression
of a dissertation or exposition of scientific or other principles
relevant to the case, which the finder of fact may apply to the
facts. Fed. R. Evid. 702, advisory comm. note, 28 U.S.C. App. at
8871 (1994). Opinion testimony of an expert not supported by an
adequate foundation of relevant facts, data, or opinions,
however, is inadmissible conjecture or speculation. See Randolph
43
See also Estate of Carpenter v. Commissioner, T.C. Memo.
1993-97.
44
See also Shoney's S., Inc. v. Commissioner, T.C. Memo. 1984-
413 n.2, wherein we also disregarded legal conclusions contained
in a report prepared by Mr. Wilgus.
- 65 -
v. Laeisz, 896 F.2d 964, 967-968 (5th Cir. 1990); Twin City
Plaza, Inc. v. Central Sur. & Ins. Corp., 409 F.2d 1195, 1200
(8th Cir. 1969); Graham, Federal Practice and Procedure, sec.
6641, at 251-252 (Interim ed. 1992). An expert may base an
opinion or inference on facts that the expert knows from first
hand observation, that are in the record and made known to the
expert, or that, although not in the record, are "of a type
reasonably relied upon by experts in the particular field in
forming opinions or inferences upon the subject." Fed. R. Evid.
703; see also Ramsey v. Culpepper, 738 F.2d 1092, 1101 (10th Cir.
1984); In re Aircrash in Bali, Indonesia on April 22, 1974, 684
F.2d 1301, 1314 (9th Cir. 1982); Baumholser v. Amax Coal Co., 630
F.2d 550, 552-553 (7th Cir. 1980).
Although otherwise inadmissible data underlying an expert's
opinion may be admitted at trial, the use of that data is limited
to explaining the expert's reasoning, and is not admitted as
substantive evidence. Fed. R. Evid. 703, 705; Engebretsen v.
Fairchild Aircraft Corp., 21 F.3d 721, 728-729 (6th Cir. 1994);
United States v. Wright, 783 F.2d 1091, 1100 (D.C. Cir. 1986);
Paddack v. Dave Christensen, Inc., 745 F.2d 1254, 1261-1262 (9th
Cir. 1984). Factual allegations that are not otherwise in the
record that are relied upon by an expert witness may be admitted
as substantive evidence only if proper foundational requirements
are satisfied; i.e., where the expert testifies from personal
- 66 -
knowledge of the facts relayed. See Fed. R. Evid. 602.
Accordingly, to the extent that the testimony of an expert states
factual allegations that are not otherwise properly in the
record, i.e., no foundation was laid establishing that the
witness had an opportunity to observe and actually did observe
the fact to which the witness testified, we disregard such
testimony.
Although we have considered and given due weight to the
conclusions of the experts, we do not set forth infra those
conclusions except where we believe it will help explain our
rationale for finding that a specific disputed property item
constitutes personal property or a structural component. We turn
next to consideration of the appropriate categories for the
disputed items.
1.45 Primary and Secondary Electrical Distribution Systems
The primary and secondary electrical distribution systems
(Property Unit 1900) include the main panels, main motor control
centers, transformers, the secondary distribution panels, and
related wiring and conduit. See supra pp. 9-12. The parties
have stipulated to the portion of the electrical load conveyed by
the primary and secondary electrical distribution systems to
hospital equipment and to the portion conveyed to items related
45
Our numbering of the groups of disputed property items
considered in this Opinion corresponds to the numbering utilized
by petitioners in their briefs.
- 67 -
to the operation and maintenance of petitioners' buildings. See
supra p. 12.
Petitioners contend that the portion of the primary and
secondary electrical distribution systems which carry electrical
loads to particular items of business equipment constitutes
section 1245 class property within the meaning of sections 1.48-
1(c) and 1.1245-3(b), Income Tax Regs., because that portion of
the electrical distribution systems does not relate to the
operation or maintenance of a building. Respondent counters that
those disputed property items are structural components of the
buildings to which they relate because they are inherently
permanent and are not readily removable.
Respondent agrees that our decision in Morrison, Inc. v.
Commissioner, supra, as affirmed by the Court of Appeals for the
Eleventh Circuit, provides authority for petitioners' position
that the primary and secondary electrical distribution systems
are not structural components to the extent of the load
percentages that the parties stipulated are carried to equipment.
Our holding in Morrison follows our holding in Scott Paper Co. v.
Commissioner, 74 T.C. 137, 186-187 (1980), that the portion of
the taxpayer's primary electrical distribution system which did
not relate to the overall operation or maintenance of buildings
constituted tangible personal property under section 48(a)(1)(A)
and therefore was eligible for ITC. Respondent, however, urges
- 68 -
the Court to disavow Scott Paper Co. v. Commissioner, supra, and
its progeny, and instead to follow the reasoning of A.C. Monk &
Co. v. United States, 686 F.2d 1058, 1065-1066 (4th Cir. 1982)
(no justification for allocating portions of a single electrical
system; components of electrical system are structural components
if they can be reasonably adapted to general uses), or of
Illinois Cereal Mills, Inc. v. Commissioner, 789 F.2d at 1244(electrical distribution system was "other tangible property"
under section 48(a)(1)(B)).46
46
Absent a stipulation to the contrary, the instant case is
appealable to the Court of Appeals for the Sixth Circuit and
therefore is not controlled by the decisions of the Courts of
Appeals for the Fourth Circuit (A.C. Monk & Co. v. United States,
686 F.2d 1058 (4th Cir. 1982)) or Seventh Circuit (Illinois
Cereal Mills, Inc. v. Commissioner, 789 F.2d 1234 (7th Cir.
1986), affg. T.C. Memo. 1983-469). See Golsen v. Commissioner,
54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971). The
Court of Appeals for the Sixth Circuit has not decided the issue;
accordingly, we decide the instant case as we think proper.
Lardas v. Commissioner, 99 T.C. 490, 498 (1992).
We note, however, that in Morrison, Inc. v. Commissioner,
891 F.2d 857, 863 n.* (11th Cir. 1990), the Court of Appeals for
the Eleventh Circuit stated as follows:
*We note that only Scott Paper is directly on point. In
Scott Paper, the Tax Court analyzed a primary electrical
system to determine whether it partially qualified as
tangible personal property under section 48(a)(1)(A). The
Illinois Cereal and the Monk courts, however, discussed
whether portions of primary electrical systems constituted
other tangible personal property under section 48(a)(1)(B).
Although the Illinois Cereal court stated at the end of its
opinion that the taxpayer's primary electrical system did
not constitute tangible personal property, the court did not
squarely face the issue. See Illinois Cereal, 789 F.2d at
1239 ("[Taxpayer] does not contend that its electrical
distribution system is 'tangible personal property' under
(continued...)
- 69 -
Respondent contends further that the disputed property items
in the subject category are distinguishable from the primary and
secondary electrical distribution property items involved in
Scott Paper Co. v. Commissioner, supra, because in that case the
electrical components were readily removable, they were not
inherently permanent, they were inextricably linked to and
installed in conjunction with the addition of particular pieces
of machinery, and most of the electricity carried by the
electrical components was conveyed to the new equipment.
In Morrison, Inc. v. Commissioner, T.C. Memo. 1986-129, we
explained our rationale for finding a portion of the primary and
secondary electrical system in Scott Paper Co. eligible property
for ITC as follows:
In Scott Paper Co., we concluded that the components of the
taxpayer's primary electric system which supplied the
electric needs of process machinery rather than contributing
to the overall operation or maintenance of buildings, was
not an inherently permanent structure and the taxpayers were
entitled to the investment tax credit on these components.
In reaching this conclusion we placed great emphasis on the
language in section 1.48-1(e)(2), Income Tax Regs., which
defines "structural components" by listing examples and
including as the last line of the regulation "and other
components relating to the operation or maintenance of a
building." In Scott Paper Co., supra at 183, we
characterized that phrase as follows:
46
(...continued)
section 48." (Emphasis added)).
Thus, it is not clear whether Illinois Cereal actually supports
respondent's position.
- 70 -
a descriptive phrase intended to present the basic
test used for identifying structural components.
The preceding elements are examples of items which
meet the test as a general rule. Items which
occur in an unusual circumstance and do not relate
to the operation or maintenance of a building
should not be structural components despite being
listed in section 1.48-1(e)(2), Income Tax Regs.
* * *
We also quoted the Technical Explanations of the Revenue Act
of 1962 which explained the language which was incorporated
in the regulation as follows:
The term "structural components" of a building
includes such parts of the building as central
air-conditioning and heating systems, plumbing,
and electric wiring and lighting fixtures,
relating to the operation [or] maintenance of the
building. [H. Rept. 1447, 87th Cong., 2d Sess.
(1962), 1962-3 C.B. 503, 516; S. Rept. 1881, 87th
Cong., 2d Sess. (1962), 1962-3 C.B. 843, 859.]
In accordance, we concluded that property fails to qualify
for the credit if it relates to the overall operation or
maintenance of a building rather than being used to aid in
the employment of a particular function or particular piece
of property. See Central Citrus Co. v. Commissioner, 58
T.C. 365, 374 (1972).
We focused on the ultimate uses of power at the
taxpayer's facility in Scott Paper Co. and distinguished the
power used in the overall operation or maintenance such as
lighting, heating, ventilation and air-conditioning of the
building and the power used to operate the taxpayer's
machinery. Scott Paper Co. v. Commissioner, supra at 183-
184. We thus concluded in Scott Paper Co. that:
To the extent that the primary electric carried
electrical loads to be used for pulp and paper
production processes or other such qualifying
uses, the investment credit will be allowed for
the primary electric improvements.
To the extent that the primary electric
improvements relate to the overall operation [or]
maintenance of buildings, they are structural
components of such buildings, and they do not qualify
as tangible personal property.
- 71 -
We find no material differences between the facts in the
instant case and those facts present in Scott Paper Co. v.
Commissioner, supra, and Morrison, Inc. v. Commissioner, supra,
relating to the primary and electrical distribution systems. For
the reasons previous articulated in both of those case, we
conclude that the portion of the cost of the primary and
secondary electrical distribution systems in petitioners'
hospitals which is equal to the percentage of the electrical load
carried to those systems allocable to the hospitals' equipment,
as stipulated by the parties, constitutes section 1245 class
property, depreciable over a 5-year recovery period.
2. Branch Electrical Wiring and Connections and Special
Electrical Equipment
The branch electrical wiring and connections (hereinafter
branch wiring) relate to several items of hospital equipment and
are contained in many different property units including
controls, battery packs, and battery chargers for the emergency
power generation systems (Property Unit 2200); x-ray film
processing equipment (Property Unit 2244); illuminated emergency
entrance signs and illuminated hospital front entrance signs
(Property Unit 2320); medical gas control equipment and medical
gas alarm equipment (Property Unit 3026); hospital kitchen
equipment (Property Unit 3075); equipment located in the hospital
laboratory and maintenance shop areas (Property Unit 3195);
synchronously wired clock systems (Property Unit 3280); air
- 72 -
conditioners located in the hospital computer rooms (Property
Unit 3292); hospital central sterilization equipment (Property
Unit 3298); items of hospital equipment located in the operating
rooms, recovery rooms, intensive care units, infant nurseries,
radiology areas, patient rooms, laboratories, and kitchens
(Property Unit 4040). See supra pp. 12-16.
The parties have stipulated that 100 percent of the
electrical load carried by the branch wiring relating to the
controls, battery packs, and battery chargers for the emergency
power generation systems, the x-ray film processing equipment,
the illuminated emergency entrance signs and the illuminated
hospital front entrance signs, the medical gas control equipment
and medical gas alarm equipment, the synchronously wired clock
systems, the air conditioners located in the hospital computer
rooms, and the hospital central sterilization equipment, is
conveyed to the particular items of equipment to which they
relate. The parties agree further that the branch wiring is
necessary and required for the operation and use of the items to
which they relate and, during the years in issue, was used only
with those items. The parties additionally have stipulated that
all of the electrical receptacles in dispute are used to provide
localized electrical service for specific items of equipment
located in the kitchens, patient rooms, laboratories, and
maintenance shop areas of petitioners' hospitals, which equipment
- 73 -
respondent agrees is 5-year personal property. We refer to the
branch wiring and special electrical equipment in issue in the
subject category collectively as the branch electrical systems.
Petitioners contend that the branch electrical systems are
section 1245 class property pursuant to the reasoning of Scott
Paper Co. v. Commissioner, 74 T.C. 137 (1980), and its progeny,
as well as Rev. Rul. 66-299, 1966-2 C.B. 14.47 Petitioners
contend that the parties agree that virtually every item to which
the branch wiring relates was appropriately classified as section
1245 class property.
Respondent, however, contends that the disputed property
items in the subject category are inherently permanent and are
identified as a structural component (electric wiring) in section
1.48-1(e)(2), Income Tax Regs. On brief, respondent segregates
the disputed property items into individual segments of conduit,
electrical wiring, junction boxes, outlets, and receptacles.
47
A revenue ruling reflects respondent's position on an issue
and is not binding precedent upon the Court. See Halliburton Co.
v. Commissioner, 100 T.C. 216, 232 (1993), affd. without
published opinion 25 F.3d 1043 (5th Cir. 1994); Stark v
Commissioner, 86 T.C. 243, 250-251 (1986); Neuhoff v.
Commissioner, 75 T.C. 36, 46 (1980), affd. 669 F.2d 291 (5th Cir.
1982). We disregard a revenue ruling, if it conflicts with the
statute it supposedly interprets, with the statute's legislative
history, or if it is otherwise unreasonable. E.g., Threlkeld v.
Commissioner, 848 F.2d 81, 84 (6th Cir. 1988), affg. 87 T.C. 1294(1986). However, we may adopt its reasoning if we agree that the
ruling correctly applies the law. Estate of Lang v.
Commissioner, 64 T.C. 404, 406-407 (1975), affd. in part and
revd. in part 613 F.2d 770, 776 (9th Cir. 1980); Keating v.
Commissioner, T.C. Memo. 1995-101.
- 74 -
Respondent contends that the conduit is designed to remain in
place throughout its expected useful life, is identical to other
conduit which petitioners have agreed is a structural component,
and is typical of electrical conduit used at other commercial
establishments. Respondent contends that the electrical wiring
is not designed or installed with a particular piece of
equipment, is not easily removable, and is not economically
practicable to reuse. Respondent contends that none of the
electrical outlets, receptacles, and junction boxes are
inextricably linked to specific items of machinery, they are not
moved, they are typical of outlets, receptacles, and junction
boxes used in commercial facilities, and they relate to the
operation of the buildings in that they provide points for the
provision of power for many property items including employee
radios in the laboratories and power tools in the shop areas.
As we understand respondent's position, respondent agrees
that the disputed property items in the subject category are
necessary for, and used exclusively with, the operation of
various items of equipment. Nevertheless, respondent contends
that the branch electrical systems are structural components
because they were not designed for or installed with the specific
equipment to which they relate, they are adaptable for other
purposes, are composed of standard electrical supplies, have
useful lives not inextricably linked to the specific equipment
- 75 -
with which they are used, and are not readily removable.
Additionally, with regard to the electrical outlets, receptacles,
and junction boxes located in laboratory and shop areas,
respondent asserts that those disputed property items may be used
to power nonhospital equipment or equipment relating to the
operation or maintenance of the buildings. To decide whether the
disputed property items in the subject category constitute
personal property or structural components of the buildings to
which they relate, we apply the reasoning in Scott Paper Co. v.
Commissioner, supra, and cases following its rationale.
In Scott Paper Co. v. Commissioner, 74 T.C. at 182-183, we
noted that even though section 1.48-1(e)(2), Income Tax Regs.,
lists items such as "wiring and lighting fixtures" in describing
structural components, to constitute a structural component of a
building, the item nonetheless must relate to the operation or
maintenance of the building. Subsequently, in Morrison, Inc. v.
Commissioner, T.C. Memo. 1986-129, we found that much of the
electrical distribution systems constituted personal property.
We stated:
Respondent points out that the reasonable adaptability of
the electrical distribution system with minimal effort to
accommodate another cafeteria, a restaurant or a retail
sales establishment such as a furniture store, indicates
that the system relates to the overall operation or
maintenance of the building rather than relating to the
function of specific pieces of kitchen machinery or
equipment. Respondent recognizes that his argument is
contrary to our holding in Scott Paper Co., supra.
Following our holding in Scott Paper Co. v. Commissioner, 74
- 76 -
T.C. 137, 184 (1980), we focus on the ultimate use of the
electrical power in petitioners' cafeterias in order to
determine whether the electrical distribution system
constitutes a structural component. An allocation should
then be made based on the qualifying and nonqualifying uses
of the power.
Similarly, in Duaine v. Commissioner, T.C. Memo. 1985-39, we
analyzed various items of property contained in a fast food
restaurant to determine whether they qualified for ITC. We
followed the reasoning of Scott Paper Co. v. Commissioner, supra,
in finding that electrical outlets and conduits that provided
localized power sources for the lessee's specialized restaurant
equipment constituted personal property.
In Rev. Rul. 66-299, 1966-2 C.B. at 16, respondent concluded
that:
special electrical or plumbing connections which are
necessary to and are used directly with a specific item of
machinery or equipment, or between specific items of
individual, machinery or equipment, are not structural
components of the building, but are essentially items of
machinery or equipment, and qualify as section 38 property
for investment credit purposes.
We analyzed that language in Central Citrus Co. v. Commissioner,
58 T.C. at 374, and stated:
Such language creates a clear distinction between property
used in the general overall operation of a building * * *
and that property which is utilized to aid in the employment
of a particular function or particular piece of property.
We find this particular dichotomy to be both reasonable and
sound and in agreement with congressional intent. * * *
[Citations omitted.]
Accordingly, we held in Central Citrus Co. that distribution
system adapters, contractors, fuses, starters, switches, and
- 77 -
relays served specialized functions or specific equipment used in
the taxpayer's citrus fruit processing business and therefore
qualified for ITC.
Respondent argues that the disputed property items
comprising the branch electrical systems are not identical to the
primary and secondary electrical systems involved in Scott Paper
Co. v. Commissioner, supra, and Morrison, Inc. v. Commissioner,
supra, or to the electrical connections involved in Duaine v.
Commissioner, supra, or to the "special electrical or plumbing
connections" described in Central Citrus Co. v. Commissioner,
supra, and Rev. Rul. 66-299, supra. We, however, conclude that
there are no material differences among those items and the
disputed property items in the subject category.
Respondent argues further that the wiring and conduit
located in the walls or floors of the hospitals are inherently
permanent because they are not movable. Movability, however, is
not the sole determinant as to what constitutes section 1245
personal property. Kramertown Co. v. Commissioner, 488 F.2d at
731; Consolidated Freightways v. Commissioner, 708 F.2d at 1390;
Everhart v. Commissioner, 61 T.C. at 331; Dixie Manor, Inc. v.
United States, 44 AFTR 2d at 79-5444 to 79-5446, 79-2 USTC par.
9469. The fact that some of the wiring and conduit is contained
in the walls and floors of the hospitals is not relevant in
determining whether those items are personal property. We look
- 78 -
to the ultimate use of the electrical power conveyed by the
branch electrical systems to decide whether the disputed property
items constitute structural components or personal property.
Scott Paper Co. v. Commissioner, supra; Morrison, Inc. v.
Commissioner, supra.
From the foregoing, we learn that a disputed property item
constitutes a structural component to the extent that it
furnishes electrical power for a function or equipment that
relates to the operation or maintenance of a building.
Conversely, to the extent that a disputed property item furnishes
electrical power for a function or equipment that does not relate
to the operation or maintenance of a building, the disputed
property item constitutes tangible personal property. Scott
Paper Co. v. Commissioner, supra; Central Citrus Co. v.
Commissioner, supra; see also Texas Instruments, Inc. v.
Commissioner, supra; Morrison, Inc. v. Commissioner, supra;
Duaine v. Commissioner, supra.
The x-ray film processing equipment (Property Unit 2244),
medical gas control equipment and medical gas alarm equipment
(Property Unit 3026), and hospital central sterilization
equipment (Property Unit 3298) aid in the rendition of healthcare
services and, therefore, the branch electrical systems relating
to that equipment do not relate to the operation or maintenance
of the buildings. Branch electrical systems relating to items of
- 79 -
hospital equipment located in the operating room, recovery room,
intensive care units, infant nurseries, radiology areas, patient
rooms, laboratories, and kitchens (Property Unit 4040) also are
property items related to furnishing medical services rather than
to providing building services. Accordingly, we hold that the
branch electrical systems relating to Property Units 2244, 3026,
3298, and 4040 constitute tangible personal property, and that
they are depreciable over a 5-year recovery period.
The parties agree that the emergency generator (Property
Unit 2200) and emergency entrance signs and illuminated hospital
front entrance signs (Property Unit 2320) are 5-year property.
In our view, those items, as well as the hospital kitchen
equipment (Property Unit 3075), constitute assets accessory to
the conduct of petitioners' healthcare business, within the
meaning of S. Rept. 1881, 87th Cong., 2d Sess. (1962), supra,
1962-3 C.B. 707, 722, and, consequently, they do not relate to
the operation or maintenance of the buildings. See Morrison,
Inc. v. Commissioner, supra (emergency lighting qualifies as
asset accessory to a business); S. Rept. 95-1263, at 117 (1978),
supra, 1978-3 C.B. (Vol. 1) 315, 41548 (special lighting,
48
In connection with the enactment of the Revenue Act of 1978,
Pub. L. 95-600, 92 Stat. 2763, the report of the Senate Finance
Committee stated among other things as follows:
the committee wishes to clarify present law by stating that
tangible personal property already eligible for the
(continued...)
- 80 -
identity symbols, and signs (except billboards) are tangible
personal property). The parties agree further that the computer-
room air conditioners (Property Unit 3292) are 5-year property,
presumably because they satisfy the "sole justification" test of
section 1.48-1(e)(2), Income Tax Regs,49 and they consequently
48
(...continued)
investment tax credit includes special lighting (including
lighting to illuminate the exterior of a building or store,
but not lighting to illuminate parking areas), false
balconies and other exterior ornamentation that have no more
than an incidental relationship to the operation or
maintenance of a building, and identity symbols that
identify or relate to a particular retail establishment or
restaurant such as special materials attached to the
exterior or interior of a building or store and signs (other
than billboards). Similarly, floor coverings which are not
an integral part of the floor itself such as floor tile
generally installed in a manner to be readily removed (that
is it is not cemented, mudded, or otherwise permanently
affixed to the building floor but, instead, has adhesives
applied which are designed to ease its removal), carpeting,
wall panel inserts such as those designed to contain
condiments or to serve as a framing for pictures of the
products of a retail establishment, beverage bars,
ornamental fixtures (such as coats-of-arms), artifacts (if
depreciable), booths for seating, movable and removable
partitions, and large and small pictures of scenery,
persons, and the like which are attached to walls or
suspended from the ceiling, are considered tangible personal
property and not structural components. Consequently, under
existing law, this property is already eligible for the
investment tax credit. [S. Rept. 95-1263, at 117, 1978-3
C.B. (Vol. 1) 315, 415.]
49
Sec. 1.48-1(e)(2), Income Tax Regs., provides in pertinent
part as follows:
the term "structural components" does not
include machinery the sole justification for
the installation of which is the fact that
(continued...)
- 81 -
also would not relate to the operation or maintenance of the
buildings. See Piggly Wiggly S., Inc. v. Commissioner, 84 T.C.
at 748-756 (HVAC units installed to meet temperature and humidity
requirements of refrigeration equipment of grocery stores qualify
as tangible personal property). The branch electrical systems
relating to those items of equipment similarly do not relate to
the operation or maintenance of petitioners' buildings.
Accordingly, we hold that the branch electrical systems relating
to Property Units 2200, 2320, 3292, and 3075 also constitute
tangible personal property, and that they are depreciable over a
5-year recovery period.
The subject category also includes synchronously wired clock
systems (Property Unit 3280). Petitioners' expert, William J.
Neiman (Mr. Neiman), states that the clock system, located
throughout the hospital, includes clocks, timers, and personnel
time recorders that insure continuity in timekeeping. He
explains that the clock system is not found in most buildings but
49
(...continued)
such machinery is required to meet
temperature or humidity requirements which
are essential for the operation of other
machinery or the processing of materials or
foodstuffs. Machinery may meet the "sole
justification" test provided by the preceding
sentence even though it incidentally provides
for the comfort of employees, or serves, to
an insubstantial degree, areas where such
temperature or humidity requirements are not
essential.
- 82 -
typically only in facilities where the routine nature and
regularity of medical procedures is inherent to the business of
the facility. Mr. Neiman further states that the timekeeping
system is necessary for monitoring the duration and frequency of
patient symptoms and timing the administration of medical
treatments. Respondent's expert, Stephen A. Wilgus, discussed
the conduit, wiring, and electrical outlets comprising the branch
electrical systems, but he did not address the classes of assets
to which the disputed property items relate. Although it seems
that synchronized timekeeping systems are not unique to the
healthcare business, we conclude that the synchronized clocks
relate to the operations carried on within petitioners' buildings
and not to the operation or maintenance of petitioners'
buildings. Consequently, we hold that the branch electrical
systems relating to the synchronized clocks also constitute
personal property and that they also are depreciable over a 5-
year recovery period.
Lastly, the subject category includes electrical outlets,
receptacles, and junction boxes located in laboratory and shop
areas. To the extent that they are used to power employee
personal equipment or equipment relating to the operation or
maintenance of the buildings, they do not constitute personal
property. Rather, they are structural components of the
buildings. To the extent that they are used to power equipment
- 83 -
that is not employee owned or that does not relate to the
operation or maintenance of petitioners' buildings, however, they
do constitute personal property. Petitioners, however, have not
produced evidence demonstrating which electrical outlets,
receptacles, and junction boxes are used for a qualified purpose,
and we have no basis to make that determination. Accordingly, we
sustain respondent's determination that those disputed property
items must be depreciated over the same recovery period as the
building to which they relate.
3. Wiring and Related Property Items Relating to Television
Equipment
The disputed property items in the subject category
(Property Unit 2340) consist of wiring and related property items
that relate to the television antennae and television sets
located in the hospitals. See supra pp. 16-17.
Petitioners contend that the branch wiring relating to the
television equipment is section 1245 class property, depreciable
over 5-year periods, pursuant to the reasoning of Scott Paper Co.
v. Commissioner, supra, and its progeny, as well as Rev. Rul. 66-
299, 1966-2 C.B. 14. Respondent contends that the disputed
property items in the subject category are inherently permanent
and are identified as a structural component (electric wiring) in
section 1.48-1(e)(2), Income Tax Regs. The parties agree that
the master television antennae are 5-year property.
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We conclude for the reasons discussed supra relating to the
branch electrical systems that the branch wiring in the subject
category constitutes assets accessory to the conduct of
petitioners' healthcare business within the meaning of S. Rept.
1881 supra, 1962-3 C.B. at 722. The disputed property items in
the subject category do not relate to the operation or
maintenance of the buildings. Consequently, we hold that the
wiring and related property in Property Unit 2340 constitute
tangible personal property, depreciable over a 5-year recovery
period.
4-5. Conduit, Floor Boxes, Power Boxes and Outlet Jacks
Relating to Telephone Equipment and Electrical Wiring,
Conduit, and Connections Relating to Internal
Communications Equipment
The telephone equipment in the subject categories (Property
Unit 2330) includes conduit installed specifically to house the
telephone wiring, telephone floor boxes, telephone power boxes,
and telephone outlet jacks, which cannot be used for any purpose
other than as a connection point for petitioners' telephones.
See supra p. 17. Respondent agrees that those items are required
for the use and operation of the telephones in petitioners'
hospitals and, during the years in issue, were used only with the
telephones and telephone equipment located in the hospitals.
The internal communications equipment in dispute (Property
Unit 3090) consists of wiring and conduit, junction boxes,
outlets, and sleeves that are necessary for the operation of the
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hospital intercom, dictation, paging, and nurse call systems.
See supra pp. 17-18. During years ended 1985 through 1988, those
items were used only with those particular systems, and the
hospital blueprints indicate that the items are to be used
specifically with those systems.
Respondent agrees that the telephone enclosures are properly
classified as personal property, but contends that the conduit,
floor boxes, power boxes, and outlets that are necessary for
petitioners to use the telephones and the enclosures constitute
structural components of a building. We do not agree.
The electrical connections in the subject categories are
necessary for the operation of telephones and internal
communications equipment and are used directly with the equipment
to which they relate, and, consequently, they are considered a
part of that equipment. Scott Paper Co. v. Commissioner, supra;
Morrison, Inc. v. Commissioner, T.C. Memo. 1980-129.
Accordingly, we hold that the disputed property items in Property
Units 230 and 3090 constitute personal property and are
depreciable over 5-year periods.
6. Carpeting
The carpeting (Property Unit 2140) was installed in the
hospital facilities during construction. See supra p. 18. It
was attached to the floors of the hospitals using a general
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purpose latex adhesive. Most of the carpeting already has been
removed.
Petitioners contend that the carpeting was not a structural
component of petitioners' hospital buildings within the meaning
of section 1.48-1(e)(2), Income Tax Regs. Petitioners contend
that the carpeting was easily removed, its removal did not damage
the concrete floors of the hospitals, and that, if necessary, the
carpeting could have been reinstalled in other locations with new
adhesives. Additionally, petitioners contend that the carpeting
was not an integral part of, or a permanent covering for, the
hospital floors. Petitioners further contend that section 1.48-
1(e)(2), Income Tax Regs., does not list carpeting as a
structural component of a building. Accordingly, petitioners
contend, the carpeting must be an integral part of, and a
permanent covering for, the concrete floors of petitioners'
hospitals to constitute a structural component of a building
under section 1.48-1(e)(2), Income Tax Regs.
Respondent contends that the carpeting constitutes a
structural component. Respondent maintains that the carpet is
typical of carpeting used in other business and professional
facilities, is custom cut, is attached to the concrete flooring
by adhesives, is designed to remain in place until its useful
life is exhausted, provides a minimally acceptable floor finish,
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would be damaged on removal, and is not reusable except for scrap
purposes.
Petitioners counter that the carpeting in all material
respects is indistinguishable from the wall-to-wall carpeting
installed in guest rooms, office space, bar areas, and dining
rooms of a motel described in Rev. Rul. 67-349, 1967-2 C.B. 48.
In that Revenue Ruling, respondent ruled that the carpeting was
personal property for purposes of section 1.48-1(c), Income Tax
Regs., and not a structural component of a building.
The carpeting described in Rev. Rul. 67-349 was fastened
with hooks attached to wood strips that were nailed along each
wall. Rev. Rul. 67-349, 1967-2 C.B. at 48. In holding that the
carpeting, installed over concrete floors, constituted personal
property, respondent explained:
The "wall-to wall" carpeting installed in a building in
the manner described above is not an integral part of the
floor itself, and therefore, the carpeting is not a
permanent covering for the floor. Thus, the "wall-to-wall"
carpeting in the instant case is not a "structural
component" within the meaning of the regulations. [Rev.
Rul. 67-349, 1967-2 C.B. at 49.]
Respondent contends that the carpeting involved in the
instant case is distinguishable from the carpeting described in
Rev. Rul. 67-349, supra, because it is more permanent, is
installed directly on an unsealed concrete slab by adhesive, and
is not reusable. Petitioners counter that S. Rept. 95-1263,
supra, 1978-3 C.B. (Vol. 1) at 415, see supra note 48, expressly
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and unequivocally recognized that all carpeting is personal
property and is not to be considered a structural component of a
building.
Respondent contends, however, that the record does not show
that the carpeting involved in the instant case was installed
with adhesives designed to ease its removal as was the situation
in the example reflected in S. Rept. 95-1263, supra. Respondent
relies on Minot Fed. Sav. & Loan Association v. United States,
313 F. Supp. 294, 296 (D.N.D. 1970), affd. 435 F.2d 1368 (8th
Cir. 1970), wherein the District Court stated:
Carpeting is now considered a permanent covering and one of
the recognized methods of permanently finishing floors for
use. A finished floor, or permanent finished floor
covering, is essential for the proper and necessary
operation and maintenance of a building.
We conclude that the carpeting involved in the subject
category is not materially different from the carpeting described
in Rev. Rul. 67-349, supra. We are persuaded from the record
that the carpeting is not an integral part of the floor and
satisfies the criteria for tangible personal property outlined in
Whiteco Indus., Inc. v. Commissioner, 65 T.C. at 672-673.
Petitioners have shown that they did not intend for the carpeting
to be permanently affixed to the underlying floor and that much
of the carpeting already has been removed. The carpeting was
attached with adhesives that facilitate ease of removal, and,
although the carpeting could have been reused in another
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location, it was discarded because of potential health hazards
resulting from its placement in hospital buildings.
Respondent's reliance on Minot Fed. Sav. & Loan Association
v. United States, supra, is misplaced. Carpeting was not in
issue in Minot. In the passage quoted above and cited by
respondent, the District Court admonished the Government for
taking an inconsistent and contrary position (that removable
partitions were structural components) from the principles and
rationale of Rev. Rul. 67-349 (that "wall-to-wall" carpeting was
tangible personal property). The District Court did not find
that carpeting per se constitutes a structural component. The
Minot case, furthermore, predates the Senate Finance Committee
report for the 1978 Revenue Act wherein carpeting specifically is
identified as tangible personal property. S. Rept. 95-1263,
1978-3 C.B. (Vol. 1) at 415.
Based on the foregoing, we hold that the carpeting in the
subject category constitutes tangible personal property and that
it is depreciable over a 5-year recovery period.
7. Vinyl Wall Coverings
The vinyl wall coverings (Property Unit 2380) in the subject
category are the original vinyl wall coverings placed in
petitioners' facilities during construction. See supra p. 19.
Petitioners contend that the vinyl wall coverings are not
structural components of petitioners' buildings, but are section
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1245 class property used in petitioners' businesses and that they
are depreciable over 5-year periods. Respondent contends that
the vinyl wall coverings are structural components of the
buildings. Respondent maintains that the vinyl wall coverings
are an alternative for paint, they are intended to remain on the
walls during the useful life of the wall coverings, and they are
not readily removable or reusable.
Section 1.48-1(e)(2), Income Tax Regs., includes as an
example of a structural component walls and permanent coverings
for them. Petitioners contend that the vinyl wall coverings are
not intended or designed to be either integral parts of, or
permanent coverings for, the walls of petitioners' hospitals, but
are decorative coverings for those walls. They are easily
removable, and in most instances, due to changes in the decor of
the hospitals and heavy wear, the vinyl wall coverings already
have been removed without damage to the walls of the hospitals.
Petitioners concede that wall coverings typically are not reused
in their entirety upon removal, but assert that portions of the
vinyl wall coverings could be removed in connection with area
repair work and then reattached to the walls. Petitioners
contend that they used adhesives to attach the vinyl wall
coverings to the walls, and that method of attachment is
expressly recognized as being non-permanent in S. Rept. 95-1263,
1978-3 C.B. (Vol. 1) at 415 (see supra note 48). Petitioners
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contend that the decorative nature of the vinyl wall coverings
and the fact that "glue-sizing" was applied to the sheetrock
walls prior to placing the wall coverings on the walls also
indicate that they were intended to be temporary. Petitioners
contend that the vinyl wall coverings are similar to the lattice
millwork in issue in Morrison, Inc. v. Commissioner, supra,
because they are "merely decorative ornamentation serving no more
than an incidental relationship to the operation or maintenance
of the building" and "could easily be removed without permanently
damaging the * * * walls". Id.
In Standard Oil Co. (Ind.) v. Commissioner, 77 T.C. 349, 405
(1981) (involving the eligibility for ITC of new service station
signs and lights), we stated that, for purposes of section
48(a)(1), "all tangible property constitutes 'tangible personal
property' unless it is excluded because it is land or an
'inherently permanent structure.'" See also sec. 1.48-1(c),
Income Tax Regs. To decide whether the service station signs and
lights constituted an inherently permanent structure, we applied
the criteria announced in Whiteco Indus., Inc. v. Commissioner,
65 T.C. at 671. Standard Oil Co. (Ind.) v. Commissioner, supra.
Additionally, in Duaine v. Commissioner, T.C. Memo. 1985-39,
for the purpose of deciding whether wall and floor tiles in a
building leased to a fast food restaurant constituted inherently
permanent structures, we applied the Whiteco criteria. In
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Duaine, we held that, because the tiles were glued to the
surfaces on which they were installed and because a building's
interior tiling was included specifically as a structural
component in section 1.48-1(e)(2), Income Tax Regs., the tiles
were a permanent covering for the restaurant's walls and floors.
Id.In contrast, we are persuaded that the vinyl wall coverings
involved in the subject category were not intended to be, and
were not, a permanent covering for the hospital walls. The walls
were prepared with glue sizing to permit easy removal of the
vinyl wall coverings without damage to the walls. The vinyl wall
coverings were attached with adhesives that also permitted easy
removal. Indeed, much of the wall coverings was removed within 8
years of installation without significant damage to the walls or
to the wall coverings.
Accordingly, we hold that the vinyl wall coverings in the
subject category constitute tangible personal property, and that
they are depreciable over a 5-year recovery period.
8. Vinyl Floor Coverings
The vinyl floor coverings and matching base cove molding
(Property Unit 2370) in the subject category are the floor
coverings originally placed in petitioners' hospital facilities
during construction. See supra pp. 20-21.
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Petitioners contend that the vinyl floor coverings are not
an integral part of their buildings' floors, and, consequently,
they are not structural components but are section 1245 class
property depreciable over 5-year periods pursuant to S. Rept. 95-
1263, supra. Petitioners contend that the floor coverings are
attached to the concrete floors using general purpose latex
adhesives so that they are not permanently affixed but are easily
removed without damage to the underlying floors, that petitioners
typically remove the vinyl floor coverings every 3 to 10 years,
and that most of the vinyl floor coverings in issue have been
removed already. Petitioners further contend that the sheet
vinyl floor covering is a type of floor covering peculiar to
hospitals or other health care organizations, and that it is
section 1245 class property also because of its unusual nature.
See Scott Paper Co. v. Commissioner, 74 T.C. at 183.
Respondent contends that the vinyl floor coverings are
structural components of the buildings to which they relate
because the flooring coverings are custom cut, not readily
removable, not reusable, typical of floorings used in other
business and professional facilities, attached to the concrete
flooring by adhesives, and designed to remain in place until
their useful lives are exhausted.
The term "structural components" includes floors and any
permanent coverings for them. Sec. 1.48-1(e)(2), Income Tax
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Regs. S. Rept. 95-1263, supra, 1978-3 C.B. (Vol. 1) at 415,
however, identifies as personal property
floor coverings which are not an integral part of the floor
itself such as floor tile generally installed in a manner to
be readily removed (that is it is not cemented, mudded, or
otherwise permanently affixed to the building floor but,
instead, has adhesives applied which are designed to ease
its removal), * * *.
Applying the Whiteco criteria, we conclude that the vinyl
floor coverings are not inherently permanent. We are persuaded
that the floor coverings were not intended to be, and were not,
permanent coverings for the buildings' floors. The floor
coverings were attached with adhesives to permit easy removal
without damage to the concrete floors. Indeed, much of the floor
coverings was removed within 3 to 5 years of their installation
without damaging the underlying floors or vinyl floor coverings.
Accordingly, we hold that the vinyl floor coverings
constitute tangible personal property, and that they are
depreciable over a 5-year recovery period.
9-10. Kitchen Water Piping, Kitchen Equipment Steam Lines,
and Special X-Ray Plumbing Connections
The kitchen water piping (Property Unit 3080) in the subject
category consists of the kitchen grease waste systems (or the
grease trap system) and plumbing connections serving specific
items of kitchen equipment. See supra pp. 21-23. The plumbing
connections branch off from a hospital's main water lines and
supply water directly to specific items of equipment located in
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petitioners' kitchens, such as the dishwashers, coffee urns,
steam kettles, braising pans, and ice makers, they are necessary
for the operation of the kitchen equipment and are used solely
with the items of equipment to which they relate. The kitchen
equipment steam lines (Property Unit 3070), are identical to the
kitchen plumbing connections. The special plumbing connections
for the x-ray equipment (Property Unit 2244) are required for the
operation and use of the x-ray equipment and are used only with
that equipment. See supra pp. 22-23.
Petitioners contend that the kitchen water piping, the
kitchen equipment steam lines, and the x-ray equipment special
plumbing connections constitute personal property, depreciable
over 5-year periods. Petitioners maintain that those disputed
property items do not relate to the operation or maintenance of a
building because of their relationship with the kitchen or x-ray
equipment. They also contend that most commercial buildings do
not have kitchen grease waste systems, which are directly related
to petitioners' food preparation activities. In support of their
contentions, petitioners rely on Scott Paper Co. v. Commissioner,
supra; Morrison, Inc. v. Commissioner, supra; Duaine v.
Commissioner, supra; Texas Instruments, Inc. v. Commissioner,
supra; Central Citrus Co. v. Commissioner, supra; and Rev. Rul.
66-299, 1966-2 C.B. 14. Petitioners contend that our reasoning
in Morrison, Inc. v. Commissioner, supra, wherein we found that
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the kitchen drainage system and kitchen water piping constituted
personal property, is squarely applicable to the instant case.
Respondent contends that the disputed property items are
structural components. Respondent agrees that the disputed
property items are factually similar to property items involved
in Morrison, Inc. v. Commissioner, supra. Respondent asserts,
however, that in Morrison the taxpayers had argued that the
kitchen water piping was eligible for ITC as "other tangible
property". Respondent contends that a holding that the disputed
property items are "other tangible property" would result in
those items constituting section 1250(c) property because
petitioners are not involved in an activity enumerated in section
1245(a)(3)(B). Respondent additionally maintains that the
disputed property items are not unique to hospitals.
The terms "plumbing and plumbing fixtures" are listed
specifically in section 1.48-1(e)(2), Income Tax Regs., as
constituting structural components of a building. Nonetheless,
in Morrison, Inc. v. Commissioner, supra, we focused on the use
of the kitchen drains and concluded that the kitchen drainage
system did not relate to the operation or maintenance of a
building but rather constituted personal property because it
directly serviced the taxpayers' equipment and machinery.
Similarly, we concluded that the cafeterias' kitchen water piping
was necessary to and used directly with specific pieces of
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equipment and consequently did not relate to general building
plumbing. Id.; see also Texas Instruments, Inc. v. Commissioner,
supra; Duaine v. Commissioner, supra. The facts in the instant
case relating to the disputed property items in the subject
categories are not materially distinguishable from the facts in
Morrison, Inc. v. Commissioner, supra, and Duaine v.
Commissioner, supra.
The disputed property items in the subject categories relate
to the operation of specialized kitchen or hospital equipment.
That equipment is related to petitioners' business of providing
healthcare services. As such, the disputed property items are
assets accessory to petitioners' business and, consequently, they
do not constitute structural components of the buildings. E.g.,
Scott Paper Co. v. Commissioner, supra; Morrison, Inc. v.
Commissioner, supra; Duaine v. Commissioner, supra; Texas
Instruments, Inc. v. Commissioner, supra; Central Citrus Co. v.
Commissioner, supra.
Accordingly, we hold that the kitchen water piping, kitchen
equipment steam lines, and special x-ray plumbing connections are
personal property, and that they are depreciable over 5-year
recovery periods.
11. Kitchen Hoods and Exhaust Systems
Kitchen exhaust hoods, exhaust fans, supply air intake fans
and related duct work, and dishwasher condensate return units
constitute Property Unit 3085. See supra pp. 23-25. The exhaust
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hoods and exhaust systems dissipate air and smoke produced by the
ranges and cooking equipment located in the kitchens, ventilate
the air in the kitchen areas of petitioners' hospitals in order
to ensure the proper operation of petitioners' kitchen equipment,
replace the air expelled from the kitchens, and remove steam and
humidity expelled by petitioners' kitchen dishwashers in order to
keep the dishwashers operating properly. The kitchen hoods and
exhaust systems do not serve to ventilate areas of the hospitals
other than the kitchen areas. The dishwasher exhaust fans and
related duct work operate solely to exhaust steam and other
vapors from the dishwashers. The dishwasher condensate return
units are dedicated solely to providing emergency hot water for
the hospital dishwashers. The piping is attached to the hospital
buildings and runs directly from a dishwasher to a boiler and
back to the dishwasher.
Petitioners contend that the disputed property items in the
subject category are not structural components of a building, but
are section 1245 class property, depreciable over 5-year periods.
Petitioners maintain that removal of the disputed property items
would not affect the hospitals' main water piping or sanitary
drainage. Petitioners contend that those items do not relate to
general building plumbing and thus do not relate to the operation
or maintenance of a building. Petitioners rely on the "sole
justification" test of section 1.48-1(e)(2), Income Tax Regs., to
support their contention that the kitchen hoods and exhaust
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systems and the dishwasher condensate return units constitute
personal property within the meaning of section 1.48-1(c), Income
Tax Regs., and therefore of section 1.1245-3(b), Income Tax Regs.
Respondent contends that the disputed property items are
structural components of the buildings to which they relate.
Respondent contends that the items are not unique to hospitals,
are adaptable to other uses, are securely attached to the
building structure, and provide more than incidental benefit and
comfort to petitioners' kitchen employees. Specifically,
respondent contends that the dishwasher condensate return unit is
more closely related to the boiler than the dishwasher.
In Morrison, Inc. v. Commissioner, T.C. Memo. 1986-129, we
held that the cafeterias' kitchen air ventilation system
constituted personal property, based on the "sole justification"
test of section 1.48-1(e)(2), Income Tax Regs. Respondent agrees
that the kitchen hoods and exhaust systems, but not the
dishwasher condensate return unit, are very similar to items
involved in Morrison.
For the reasons previously discussed in Morrison, Inc. v.
Commissioner, supra, we agree with petitioners that the kitchen
hoods and exhaust systems, as well as the dishwasher condensate
return units, satisfy the "sole justification" test of section
1.48-1(e)(2), Income Tax Regs. The evidence presented by
petitioners establishes that the kitchen hoods and exhaust
systems were installed only to meet temperature or humidity
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requirements essential for the operation of petitioners' kitchen
equipment and they provide only incidental benefit to
petitioners' employees. The dishwasher condensate return units
and related piping were installed solely to provide emergency hot
water for petitioners' dishwasher equipment. The disputed
property items in the subject category consequently do not
constitute structural components of petitioners' buildings.
Morrison, Inc. v. Commissioner, supra; Duaine v. Commissioner,
supra; sec. 1.48-1(e)(2), Income Tax Regs.
Accordingly, we hold that the disputed property items in the
subject category constitute personal property, and that they are
depreciable over 5-year recovery periods.
12. Patient Corridor Handrails
Patient corridor handrails (Property Unit 3190) are
handrails placed along the patient corridors of petitioners'
hospital facilities to assist patients. See supra pp. 25-26.
The handrails can be removed from the walls by removing the bolts
holding them in place, and their removal would not damage the
hospital walls. In some instances, the handrails have been
removed.
Petitioners contend that the patient corridor handrails
constitute section 1245 class property, depreciable over 5-year
periods. Additionally, petitioners contend that the disputed
property items in the subject category are peculiar to hospitals
and other medical facilities and that they do not relate to the
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operation or maintenance of the buildings. Petitioners further
contend that the patient corridor handrails are analogous to the
vault doors, record vault doors, night depository facilities, and
walk-up and drive-up teller's windows that, in Rev. Rul. 65-79,
1965-1 C.B. 26, constituted personal property within the meaning
of section 1.48-1(c), Income Tax Regs., because the items were
accessory to the banking business. Petitioners contend that
patient corridor handrails are clearly distinguishable from
bumper guards which are used to protect the hospital walls and
which have been treated as relating to the operation of
petitioners' buildings. Petitioners contend further that the
patient corridor handrails are reusable.
Respondent contends that the patient corridor handrails are
structural components because they relate to the operation and
maintenance of the hospital buildings. Respondent agrees that
the handrails are removable but asserts that they generally are
not reusable. Respondent does not agree that the patient
corridor handrails relate to the provision of healthcare
services. Respondent asserts that they protect walls, similar to
bumper guards, and provide support for anyone needing it, similar
to handrails in stairwells.
Section 1.48-1(c), Income Tax Regs., provides that all items
contained in or attached to a building constitute personal
property, unless they constitute structural components of a
building. Section 1.48-1(e)(2), Income Tax Regs., provides that,
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for a property item to constitute a structural component of a
building, it must relate to "the operation or maintenance of a
building." In Scott Paper Co. v. Commissioner, 74 T.C. at 183,
we stated that "Items which occur in an unusual circumstance and
do not relate to the operation or maintenance of a building" are
not structural components of a building. Moreover, assets that
are accessory to a business constitute tangible personal
property. Metro Natl. Corp. v. Commissioner, T.C. Memo. 1987-38;
S. Rept. 1881, supra, 1962-3 C.B. at 722.
We are persuaded that the patient handrails are placed in
patient corridors to aid hospital patients who might need support
and that they are not intended to function as wall protectors.
We conclude that the handrails are assets accessory to
petitioners' business of providing healthcare services within the
meaning of S. Rept. 1881, supra, 1962-3 C.B. at 722.
Consequently, we hold that the handrails do not constitute
structural components and that the patient corridor handrails
therefore constitute personal property that must be depreciated
over 5-year recovery periods.
13. Overbed Lights and Related Electrical Connections
The overbed lights (Property Unit 4050) in the subject
category are fluorescent light fixtures placed directly over the
patient beds. See supra pp. 26-27. The lights are activated
from the bedside by a doctor, nurse, or other hospital employee
in connection with examining, bathing, or preparing a patient for
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surgery. General reading lights, vanity lights, night lights,
and large double-pane windows provide other illumination for the
patient rooms.
Petitioners contend that the overbed lights are not
structural components of their buildings, but that they are
section 1245 class property, depreciable over 5-year recovery
periods. Petitioners assert that the overbed lights are not
intended or designed to be used for basic patient room
illumination, they are used solely by doctors, nurses, and staff
in examining patients and providing health care services, and
that they are accessory to petitioners' businesses. Petitioners
further contend that the overbed lights fit the description of
special lighting delineated in S. Rept. 95-1263, supra, 1978-3
C.B. (Vol. 1) at 415, and, therefore, the overbed lights
constitute section 1245 class property.
Respondent contends that the overbed lights are structural
components of the buildings to which they relate. Respondent
also contends that the overbed lights are permanently installed
in the ceiling of the buildings, provide general room
illumination, and are identical to other fluorescent lights in
the hospital buildings. Additionally, respondent disputes
petitioners' assertion that the overbed lights are used
exclusively by healthcare professionals.
Section 1.48-1(e)(2), Income Tax Regs., includes "electric
wiring and lighting fixtures" as an example of a structural
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component. Nonetheless, in S. Rept. 95-1263 (see supra note 48)
Congress recognized that "special lighting" which has no more
than an incidental relationship to the operation or maintenance
of a building constitutes personal property. E.g., Metro Natl.
Corp. v. Commissioner, supra (decorative lighting and plant grow
lights). Lighting which serves as an accessory to a business
also constitutes personal property. Id. (security lighting
illuminating the outside perimeter of a building housing a
psychiatric facility). In Morrison v. Commissioner, T.C. Memo.
1986-129, we held that the taxpayers' emergency lighting
constituted personal property and noted that lighting fixtures
and electrical connections that "do not provide basic
illumination" and that are "accessory to a business" do not
constitute structural components of a building. Id.Respondent contends that the overbed lights are not similar
to the emergency lights involved in Morrison, Inc. v.
Commissioner, but are ordinary fluorescent fixtures which provide
general room illumination. We agree.
We are not persuaded that the overbed lights are "special
lighting" within the meaning of S. Rept. 95-1263, supra, 1978-3
C.B. (Vol. 1) at 415, or that they constitute an asset accessory
to a business within the meaning of S. Rept. 1881, supra, 1962-3
C.B. at 722. The overbed lights are standard 4-tube florescent
light fixtures placed in the acoustical ceilings of the hospital
buildings. Photographs contained in the record reveal that the
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overbed lights provide basic room illumination and have more than
an incidental relationship to the operation or maintenance of
petitioners' buildings. There is no indication in the record
that petitioners intended the overbed lights to be temporary. In
our view, removal of the light fixtures would affect the
integrity of the building.
Accordingly, we hold that the overbed lights are structural
components of the buildings which constitute section 1250 class
property, and that, consequently, they are depreciable over the
same recovery periods as the buildings to which they relate.
14. Partitions
The partitions (Property Unit Number 3240) in the subject
category are accordion-style room dividers placed in conference
rooms or cafeterias on tracks attached to the ceilings of
petitioners' hospitals. See supra pp. 27-28. They are used to
divide areas of large rooms into smaller areas where conferences
and luncheons are held. The partitions are manufactured on
assembly lines and are available as catalog items from
manufacturers. None of the partitions bears any structural load.
The partitions are removable and at least one of them has been
removed from one of petitioners' hospital facilities and is
currently in storage. Removal of the partitions does not affect
the essential structure of the hospital buildings.
Petitioners contend that the partitions do not constitute
structural components of the buildings to which they relate
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because they are not permanent and are not an integral part of
the building structure but constitute personal property,
depreciable over 5-year periods. Petitioners contend that the
partitions are similar to the decorative lattice millwork in
Morrison, Inc. v. Commissioner, supra, and the movable partitions
in Minot Fed. Sav. & Loan Association v. United States, 435 F.2d
1368 (8th Cir. 1970), and King Radio Corp. v. United States, 486
F.2d 1091 (10th Cir. 1973), which were held to constitute section
1245 class property.
Respondent contends that the partitions are structural
components. Respondent maintains that, because the disputed
property items are not easily reusable because of the substantial
support system they require, the partitions are factually
distinguishable from the partitions involved in Morrison, Inc. v.
Commissioner, supra, Minot Fed. Sav. & Loan Association v. United
States, supra, and King Radio Corp., Inc. v. United States,
supra. We do not agree.
The words "partitions" and "doors" are listed in section
1.48-1(e)(2), Income Tax Regs., as items that generally
constitute structural components of a building. Nonetheless, in
Morrison, Inc. v. Commissioner, supra, we stated that doors
constitute a structural component of a building "only if they are
a permanent part of the * * * building, so that their removal
would affect the essential structure of the building." Relying
on S. Rept. 95-1263, supra, 1978-3 C.B. (Vol. 1) at 415, we found
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that decorative lattice millwork in the taxpayers' restaurants,
which served to separate the customer serving line from the
dining portions of the cafeteria and which was not used to
provide structural support for the cafeteria's ceiling, was
personal property because "The lattice millwork could easily be
removed without permanently damaging the underlying ceiling or
walls". Morrison, Inc. v. Commissioner, supra.
We are persuaded that the partitions in the subject category
are not inherently permanent. The partitions are designed to
subdivide cafeterias and conference rooms into smaller eating or
meeting space. They provide no structural support for the
ceilings or walls. The partitions are capable of being moved,
and have been removed, without damage to the building or to the
partitions. Their removal would not affect the operation or
maintenance of the buildings. The partitions have no more than
an "incidental relationship" to the overall operation or
maintenance of the buildings. Morrison, Inc. v. Commissioner,
supra; S. Rept. 95-1263 supra, 1978-3 C.B. (Vol. 1) at 415. But
cf. Texas Instruments, Inc. v. Commissioner, T.C. Memo. 1992-306(window walls were structural components); L.L. Bean, Inc. v.
Commissioner, T.C. Memo. 1997-175 (storage rack systems were
structural components).
Accordingly, we hold that the partitions are personal
property, and that they have a 5-year recovery period.
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15. Patient Bathroom Accessories and Plastic Mirrors
Bathroom accessories (Property Unit 2360) and plastic
mirrors (Property Unit 2385) in the subject category include soap
dispensers, mirrors, towel racks, grab bars, toilet paper
holders, bathrobe hooks, shower curtain rods, and toiletry
shelves, contained in the patient room bathrooms50 of
petitioners' hospital facilities. See supra pp. 28-29. The
accessories are movable and removable.
Petitioners contend that accessories located in patient room
bathrooms are an integral part of petitioners' provision of
healthcare services to their patients and are not related to the
overall operation or maintenance of a building but constitute
section 1245 class property, depreciable over 5-year periods.
Petitioners assert that the bathrooms are designed specifically
to be used only by petitioners' patients, and that they are in
addition to the public bathrooms and the employee bathrooms that
are contained in most types of buildings and which are necessary
for the operation of the buildings.
Petitioners maintain that the bathrooms and related bathroom
accessories are an accessory to the hospital business because
hospitals and other health care organizations must provide each
patient with access to a bathroom without having to enter the
50
Petitioners concede that bathroom accessories located in
employee, staff, and visitor rest rooms relate to the operation
or maintenance of petitioners' buildings.
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general patient corridor area. Petitioners rely on Scott Paper
Co. v. Commissioner, 74 T.C. at 183, in support of their
contention that the disputed property items do not relate to the
operation or maintenance of a building and should not be
considered structural components because the bathroom accessories
are items which occur in an unusual circumstance.
Respondent contends that the bathroom accessories constitute
structural components of the buildings to which they relate.
Respondent asserts that the bathroom accessories are permanent,
designed to remain in place for their useful lives, and are not
economically reusable if they are removed. Respondent contends
that the number of bathrooms or type of people who utilize the
bathroom accessory does not change the nature of the disputed
property items. Respondent denies that the patient bathroom
accessories occur in unusual circumstances, pointing to hotels,
motels, and apartment buildings that also contain a large number
of bathrooms in comparison to the number of bathrooms contained
in typical office buildings.
Although we agree with petitioners that most office
buildings do not contain one bathroom for each one-to-two persons
who will be served by the business conducted within the building,
we do not agree that the large number of patient bathrooms serve
a function unique to petitioners' business or that they are
assets accessory to the business of providing healthcare
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services. See Morrison, Inc. v. Commissioner, supra, where we
found that restroom accessories such as vanity cabinets and
counters, even though required by local occupancy codes to be
greater in number than other business buildings, were not
accessory to the taxpayers' restaurant business but constituted
structural components of a building.
We conclude that the bathroom accessories constitute
structural components of the buildings. Although capable of
being removed and reused, there is no evidence that at the time
they were installed petitioners ever intended to remove and reuse
the bathroom accessories. We are persuaded that the bathroom
accessories are and were intended to be a permanent part of the
buildings. The bathroom accessories also serve a function that
is more than incidental to the operation of the building.
Accordingly, we hold that the bathroom accessories are
structural components of the buildings to which they relate and
therefore constitute section 1250 class property, and that they
are depreciable over the same recovery period as the buildings.
16. Acoustical Ceilings
Acoustical ceiling tiles and related grid work in
petitioners' hospitals comprise Property Unit 2260. See supra
pp. 29-30. The acoustical ceilings are movable and removable,
and their removal does not damage the building structure.
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Petitioners contend that the acoustical ceilings are not
structural components of petitioners' hospital buildings, but
constitute section 1245 class property, depreciable over 5-year
periods. Petitioners assert that the acoustical ceilings serve
needs peculiar to the operation of their hospital businesses
because they prevent dust and dirt particles that accumulate on
the duct work and pipes located between the acoustical ceilings
and the structural ceilings of petitioners' hospitals from
falling into the areas below, and that they also absorb sound.
Respondent contends that the acoustical ceilings are
structural components. Respondent maintains that the acoustical
ceilings are virtually identical to the acoustical ceilings
involved in Metro Natl. Corp. v. Commissioner, T.C. Memo. 1987-
38, and Texas Instruments, Inc. v. Commissioner, supra, which we
found constituted structural components.
Section 1.48-1(e)(2), Income Tax Regs., includes ceilings as
examples of structural components. We recognized in Morrison,
Inc. v. Commissioner, supra, however, that the reference to
ceilings in the regulation means inherently permanent ceilings.
Petitioners contend that, because the acoustical ceilings in
those cases did not serve the taxpayer's particular business
needs, the facts in the instant case are distinguishable from
those involved in Metro Natl. Corp. v. Commissioner, supra, and
Texas Instruments, Inc. v. Commissioner, T.C. Memo. 1992-306.
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Petitioners maintain that the acoustical ceilings involved in the
subject category are analogous to the vault doors, walk-up and
drive-up teller's windows, and teller's booth installed by a bank
which respondent held constituted tangible personal property
within the meaning of section 1.48-1(c), Income Tax Regs.,
because their removal would not affect the continued operation of
the bank building as a building, even though their removal would
necessitate making repairs to the building and could affect the
continued operation of the bank's business. Rev. Rul. 65-79,
1965-1 C.B. 26.
We conclude that the acoustical ceilings are not materially
distinguishable from the false ceilings described in Metro Natl.
Corp. v. Commissioner, supra, or the suspended ceilings depicted
in Texas Instruments, Inc. v. Commissioner, supra. Movability is
only one characteristic to be considered in determining whether
property is a structural component. Everhart v. Commissioner, 61
T.C. 328, 331 (1973). We are persuaded that the acoustical
ceilings were designed and intended to be a permanent part of the
buildings and that their removal would affect the operation of
the buildings in which they were installed. We do not think that
the incidental benefit of trapping some dust and dirt and
providing sound reduction is sufficient to convert the ceilings
into assets accessory to petitioners' healthcare business as
petitioners contend they are. The acoustical ceilings serve a
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function that is more than incidental to the operation and
maintenance of the buildings.
Accordingly, we hold that the acoustical ceilings are
structural components of petitioners' buildings and therefore
constitute section 1250 class property and that they are
depreciable over the same recovery periods as the buildings to
which they relate.
17. Steam Boilers and Related Accessories
The steam boilers and the related accessories (Property Unit
3193) in the subject category provide heat for petitioners'
buildings and provide high-pressure steam essential to the
operation of particular items of equipment located in
petitioners' hospital facilities, such as humidifiers, air make-
up units, and central sterilization equipment. See supra p. 31.
Petitioners contend that the boilers are personal property,
depreciable over 5-year periods. Petitioners assert that
production of high-pressure steam necessary for the operation of
the hospitals' sterilizers and humidifiers is the primary reason
for the boiler's existence, and that heating the building is an
incidental function. Accordingly, petitioners contend, the
boilers satisfy the "sole justification" test of section 1.48-
1(e), Income Tax Regs.
Respondent contends that the boilers and accessories are
components of a heating system and thus constitute structural
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components because they relate to the operation or maintenance of
the hospital buildings. Respondent maintains that the boilers
are designed to generate hot water and pressurized steam
primarily for heating purposes and secondarily for use in various
hospital equipment. Respondent also asserts that the boilers
are not removable or reusable.
Section 1.48-1(e)(2), Income Tax Regs., includes as an
example of a structural component "all components (whether in,
on, or adjacent to the building) of a * * * heating system,
including motors, compressors, pipes and ducts." Specifically
excluded, however, is "machinery the sole justification for the
installation of which is the fact that such machinery is required
to meet temperature or humidity requirements which are essential
for the operation of other machinery * * *". Id.
Petitioners contend that the steam boilers are, in all
material respects, the same as the boiler facility analyzed in
Rev. Rul. 70-160, 1970-1 C.B. 7. In that ruling, a furniture
manufacturer constructed a separate boiler facility to produce
steam for use directly in the furniture manufacturing process,
for heating make-up air needed to maintain proper humidity and
temperature conditions in the machine, veneer, and cabinet room
areas of the factory, and for incidental heating of other areas
of the main factory and adjacent buildings. Id. Respondent
ruled that the boiler facility (excluding the building)
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constituted personal property because it satisfied the "sole
justification" test inasmuch as the boiler facility was
"designed, constructed, and operated for the essential purpose
and primary function of steam production, in order to furnish
additional air, and to provide the required temperature and
humidity requirements essential in the manufacture of the
furniture." Id. at 8. Respondent contends that Rev. Rul. 70-160
is inapposite because heating the buildings was the primary
purpose for the boilers.
We are not persuaded that the boilers in the subject
category were designed, constructed, and operated solely to
provide steam for the operation of petitioners' hospital
equipment and that heating the buildings is merely an incidental
function of the boilers. We also do not agree with respondent
that producing high-pressure steam for petitioners' equipment is
an incidental function of the boilers. Based on the record, we
conclude that the boilers were installed to, and did, serve dual
functions. There is no evidence that petitioners had any other
heating system for their building outside of the subject boilers.
Heat is essential for the operation of buildings. However, we
also are convinced that high-pressure steam is essential for the
operation of certain hospital equipment. Under the circumstances
present in the instant case, we find that both providing heat for
the buildings and providing high-pressure steam for the hospital
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equipment are essential functions of the boilers, and that
neither function is incidental to the other. Accordingly, the
"sole justification" test is not satisfied. See sec. 1.48-
1(e)(2), Income Tax Regs.
Based on the foregoing, we conclude that the boilers are
analogous to the electrical distribution system involved in Scott
Paper Co. v. Commissioner, 74 T.C. 137 (1980). The record,
however, does not demonstrate the percentage of the steam
produced by the boilers that is used to operate hospital
equipment. Consequently, we have no "logical and objective
measure" of the portion of the boilers that would constitute
section 1245 personal property. See Scott Paper Co. v.
Commissioner, supra at 165. Accordingly, we sustain respondent's
determination that the boilers must be depreciated over the same
period as the buildings to which they relate.
To reflect the foregoing,
Appropriate orders
will be issued.