DocketNumber： Docket Nos. 16379-94, 16380-94
Judges： RUWE
Filed Date： 4/9/1997
Status： Non-Precedential
Modified Date： 4/18/2021
1997 Tax Ct. Memo LEXIS 198">*198 Decisions will be entered under Rule 155.
MEMORANDUM FINDINGS OF FACT AND OPINION 1997 Tax Ct. Memo LEXIS 198">*199
RUWE,
| Item | FSAA Adjustment | Amount in Dispute |
| Depreciation deduction | $ 1,375,273 | $ 608,037 |
| General business credit | 22,523 | 19,622 |
1997 Tax Ct. Memo LEXIS 198">*200 The sole issue for decision is whether petitioner is entitled to an investment tax credit (ITC) under
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts, first, second, and third supplemental stipulations of facts, and stipulation of exhibits are incorporated herein by this reference. Petitioner is a Maine corporation with its principal place of business in Freeport, Maine. Petitioner is an accrual basis, calendar year taxpayer. For its taxable year ended December 31, 1987, petitioner elected under section 1362(a) to be taxed as an S corporation.
Petitioner is a retailer of outdoor sporting specialty goods, including both apparel and sporting equipment. Petitioner1997 Tax Ct. Memo LEXIS 198">*201 purchases merchandise from various vendors and manufacturers and sells merchandise principally through a nationwide and international catalog distribution system. Petitioner requires a substantial reserve inventory of merchandise, which is shipped to petitioner's distribution center located in Freeport, Maine.
As part of the expansion of its distribution center in 1986, petitioner placed in service a storage facility (the Reserve Facility) and a shipping building (the 1986 Shipping Building), which contains a mezzanine (the Mezzanine System). 3
The Reserve Facility is a large storage facility which houses quantities of bulk merchandise in long rows of floor-to-ceiling racks. Petitioner began construction of the Reserve Facility in 1985 and placed it in service when construction was substantially completed in 1986. 4
1997 Tax Ct. Memo LEXIS 198">*202 The Reserve Facility is approximately 500 feet long by 190 feet wide by 52 feet high. It is located immediately adjacent to the east side of two existing buildings (the Receiving Building and the 1979 Shipping Building) and is connected to both buildings at a mezzanine level 20 feet above the main floor of the Reserve Facility. This mezzanine extends along the north face of the Reserve Facility for a depth of 26 feet and continues along the west face of the Reserve Facility at a depth of 11 feet 8 inches. A concrete block boiler room is located on the main floor of the Reserve Facility below the north mezzanine level. In addition, there is a 25-foot-wide floor-level clear area at the south end of the Reserve Facility.
The Reserve Facility does not have a standard column grid that is typically used to support the roof and walls in a free-standing building. Instead, the structural system supporting most of the roof and walls of the Reserve Facility is the rack system. Frazier Industrial Co. (Frazier), a storage rack system manufacturer, participated in the design of, and provided the necessary engineering and materials for, the rack system and structural framework for most of the 1997 Tax Ct. Memo LEXIS 198">*203 Reserve Facility. In order to save costs on structural steel, reduce labor costs, and increase storage efficiencies by eliminating interferences with dual structural systems, Frazier provided petitioner a storage rack system with increased structural capabilities. This enhanced structural rack system provides the support for the roof over the racks and for the east wall adjacent to the racks. These increased structural capabilities were accomplished by increasing the size of the vertical columns, increasing the amount of diagonal bracing on the end panels of the racks, and providing rigid connections where the shelves meet the support posts. Frazier also provided additional cross members at the roof to support the metal roof panels and additional supports to connect with the other structural elements.
Approximately 80 percent of the ground floor of the Reserve Facility is occupied by 19 rows of floor-to-ceiling storage racks, which are 446 feet long by 176 feet wide by 50 feet high, running north to south. 5 A typical rack row has vertical columns or posts 4 feet 8 inches from front to back (width) and 10 feet 2 inches apart (length). Each row of racks is separated from the next 1997 Tax Ct. Memo LEXIS 198">*204 by an aisle which is 5 feet wide. The rack posts consist of steel channel posts with a C-shaped cross section. In some locations, at the lower end of a rack post, the channel section is made stronger by welding two channels together to form a rectangular cylinder. The upper and lower portions of each rack post are spliced at approximately mid-height with a bolted connection, and each rack post is anchored to the floor of the Reserve Facility with anchor bolts. The front and back vertical rack posts are connected by L-shaped steel angles, which were welded to the rack posts prior to being delivered to the site. Diagonal angles welded between the two posts in an X-pattern prior to shipping create a rigid truss that provides lateral stability to the racks in the east-west direction.
The rack posts in each row are connected by horizontal beams, which span the 10-foot 2-inch distance between rack posts and also support the rack shelves and the roof deck. A typical shelf1997 Tax Ct. Memo LEXIS 198">*205 beam is 3 inches deep and 30 feet 6 inches long and connects to three rack posts. The shelf beams are connected to the rack posts with high strength steel bolts, creating a rigid connection that maintains a 90-degree angle between the rack posts and the beams and provides lateral stability to the racks in the north-south direction. While most of the rack shelves consist of wire mesh installed over the shelf beams, the bottom shelf consists of plywood with a metal skirt.
Petitioner's employees reach the rack shelves by using transtackers, which are customized vehicles that carry an operator and a load of merchandise at horizontal speeds up to 6.5 miles per hour both up and down the aisles and at vertical speeds up to 60 feet per minute from the bottom to the top of the racks. 6 Petitioner currently uses 10 transtackers in the Reserve Facility.
Each transtacker has a mast approximately 50 feet high, which1997 Tax Ct. Memo LEXIS 198">*206 guides the portion of the transtacker that carries the operator and load as it moves up and down from the bottom to the top of the racks. At the top of the mast, two wheels follow a guide tube, which is mounted on a tie that spans the aisle and that is attached to the racks on each side of the aisle. At the bottom, the transtacker is guided by a steel channel or track that is anchored to the floor by bolts in the center of the aisle. The transtacker has lateral wheels that engage a flared steel guide to lead the transtacker onto the track when the operator directs it into an aisle from the south clear area. The transtackers automatically slow down near the ends of the aisles and must be at ground level before a transtacker leaves an aisle. The transtackers can operate in the south clear area only when the cab is at floor level, since the mast is unstable without the guide rails.
The transtackers are powered by a dedicated electrical system installed at the top of each aisle. The top of the transtacker mast carries four trolleylike "bus bar" contacts that draw electrical power from conductors mounted adjacent to the guide tube. Outside of the aisles, in the clear area at the south1997 Tax Ct. Memo LEXIS 198">*207 end of the Reserve Facility, the transtackers are powered by self-contained batteries, which are charged with power drawn from the bus bar while the transtackers are in the aisles.
The concrete slab floor below the rack system is a minimum of 12.5 inches thick with two layers of reinforcing steel bars encased in the concrete. The slab at the north and south end clear areas of the Reserve Facility is 8 inches thick. The floor slab is extra thick under the racks to accommodate the load of the rack system. A typical heavy duty warehouse floor slab is 5 to 6 inches thick. However, a floor slab for a conventional building would require footings under the individual supporting structural columns. These footings would be thicker than the floor slab, and the size and thickness of these conventional footings are determined by the column loads and soil characteristics of the site.
The top surface of the concrete floor slab under the racks was constructed with an F100 or "superflat" finish, which is smoother and more level than a conventional concrete floor. The superflat surface is required for the efficient operation of the transtackers. With a conventional concrete floor, variations in 1997 Tax Ct. Memo LEXIS 198">*208 elevation in the floor under the transtacker wheels could cause a transtacker operating with the cab in an elevated position to buck from side to side or from front to back, forcing the operator to run the transtacker at much lower speeds. 7
Along the west wall of the Reserve Facility, there are two 30-foot-high masonry walls constructed of 12-inch-thick concrete blocks. This double masonry firewall separates the Reserve Facility from the distribution center along the northernmost 400 feet of the western side of the Reserve Facility. These walls are separated by a 7-inch air space, which would provide fire protection if either the Reserve Facility or the distribution center were to be consumed by fire. The remaining 100 feet of the west wall of the Reserve Facility, as well as the north, east, and south walls, are enclosed in a system of insulated metal wall panels. The wall panels are1997 Tax Ct. Memo LEXIS 198">*209 factory fabricated by a wall panel manufacturer and have a layer of sheet metal on either side of a foam insulation core. On the east and west sides of the Reserve Facility, the exterior wall panels are supported by horizontal I-beams, or girts, mounted on brackets that are attached directly to the racks. At the north and south end areas of the Reserve Facility, the wall panels and girts are partially supported by columns, varying from about 30 feet to 45 feet in height. Roof header beams at the top of these columns support part of the framing over the north and south end areas. The tops of the columns and the header beams are connected to the racks by open web bar joists that stabilize the tops of the columns against wind loads and maintain rigidity. These columns are supported at the bottom by foundation walls, which vary in height to conform to the outside grade. The foundation walls of the Reserve Facility are poured-in-place, reinforced concrete, consisting of continuous footings and retaining walls. The wall panels are assembled from one end of the Reserve Facility to the other. Each panel is screwed to the girts with a reinforcing clip. All the joints are caulked between the1997 Tax Ct. Memo LEXIS 198">*210 panels and on the top and bottom girts. The ends and exposed edges of panels are finished with a preformed metal trim. Within the wall system are metal ventilation louvers, a 12-foot-wide by 14-foot-high rollup door, and several hollow metal swing doors and frames.
The Reserve Facility is covered by a roof that is directly connected to and supported by the racks. The Reserve Facility's roof consists of a 1.5-inch-deep corrugated metal deck supporting rigid insulation and a waterproof membrane roof. The roof membrane and the rigid insulation are held in place with stone ballast. Special flashing and trim pieces are used to terminate the membrane at mechanical equipment penetrations and around the perimeter of the roof. The metal deck is supported by beams that run across the top of the supporting rack posts. At the north and south ends of the Reserve Facility, the roof, which includes the deck, insulation, and membrane, is supported by open web bar joists, which continue the line of the roof beams and span the distance from the last rack post to a header beam at the outside wall. Additionally, some of the Reserve Facility's mechanical and electrical systems are also supported by the1997 Tax Ct. Memo LEXIS 198">*211 rack system. Because of the structural support provided by the rack system, if it were removed, the roof would collapse and most, if not all, of the walls would fall.
An oil-fired boiler provides the heating source for the Reserve Facility. Water is heated in the boiler and circulated to various heating coils in the Reserve Facility. Eight customized rooftop ventilators, located throughout the rack area of the Reserve Facility, provide both heating and ventilation. In the summer, the ventilators draw air out, pulling air through the ventilation louvers, which are located on the north and south sides of the Reserve Facility, exhausting the warm air near the top of the Reserve Facility. In the colder months, the fan in the ventilator changes direction, drawing outside air from the top of the Reserve Facility through the ventilator cap and mixing it with return air from the top of the Reserve Facility in a plenum box. The return air is heated as it passes over the heating coils, and the mixed air is forced down a vertical plenum and distributed to the Reserve Facility at various levels through a series of diffusers in the plenum. Supplemental heating units are also located below the1997 Tax Ct. Memo LEXIS 198">*212 mezzanine floor. Six "upblast" rooftop ventilators provide additional ventilation capability, as well as emergency smoke relief in the event of a fire. Thermostats in the Reserve Facility register temperatures in the 50 degrees Fahrenheit to 85 degrees Fahrenheit range. The Reserve Facility is not air-conditioned.
The Reserve Facility's electrical systems include lighting, power, alarm, and control systems. These systems are also integrated into the rack system. Conduits, fixtures, and junction boxes are supported by the racks and other structural elements of the Reserve Facility. The Reserve Facility uses a task-lighting approach, providing illumination only where required. The two open areas and the west mezzanine of the Reserve Facility have general illumination, while the rack system area is lighted with only minimal safety lighting, since the transtackers have their own lighting on the work platform.
The Reserve Facility also contains a fire protection system that conforms to National Fire Protection Association code requirements. The fire protection system is a wet, water-based, sprinkler system, which provides protection for the contents of the racks. The sprinkler system1997 Tax Ct. Memo LEXIS 198">*213 includes sprinklers at roof level, supported by the roof, and at two other intermediate levels supported by the racks. One intermediate level is located at approximately 18.5 feet above the floor, and the other is located at approximately 39.5 feet above the floor. These intermediate sprinkler levels are integrated into the racks, and there are plywood shelves immediately above those sprinkler levels which act as fire baffles to trap the heat and activate the sprinkler heads.
The Reserve Facility was designed, and is used, for the storage and retrieval of merchandise in boxes. Merchandise arrives at petitioner's distribution center at the Receiving Building adjacent to the Reserve Facility. The merchandise is unloaded at the receiving staging area of the Receiving Building where petitioner's employees sort the boxes according to size. All boxes are tagged with a bar code for identification of the inventory therein and are banded and sent by conveyor to a pallet loading station in the 1979 Shipping Building. There, workers load the boxes onto pallets where they are delivered to the Reserve Facility or to other locations by forklift operators.
The boxes that are stored in the Reserve1997 Tax Ct. Memo LEXIS 198">*214 Facility are standard-sized boxes holding reserve merchandise inventory that is not required in petitioner's daily order picking, packing, and shipment operation. The boxes are stored in the Reserve Facility on the shelves of the storage rack system. Pallets holding boxes to be stored in the Reserve Facility are placed on "loading" conveyors located at the end of every other rack aisle on the Reserve Facility's mezzanine. Each pallet is then loaded by a transtacker operator onto the platform of a transtacker using a mechanical device that is built into the transtacker.
To store boxes on the Reserve Facility's shelves, the transtacker operator visually searches the racks for empty spaces, drives the transtacker to that location, and manually transfers one box at a time from the transtacker onto the empty rack shelf. The operator then uses a hand-held scanner to scan the bar code on the box and the bar code at the rack location where the box is being stored. This information is recorded in a computer so the location of the box and the merchandise therein is recorded and available for later retrieval.
When the merchandise stored in the Reserve Facility is needed in the picking and 1997 Tax Ct. Memo LEXIS 198">*215 shipping area, it is retrieved from the racks by the transtacker operators and distributed to other areas of the distribution center. To accomplish this, a transtacker operator is given a list of boxes of merchandise to be removed from the Reserve Facility and their locations on the shelves. The transtacker operator drives the transtacker to each box's location, manually retrieves the box of merchandise from the shelf, and places the box on a pallet located on the transtacker platform. When the operator has retrieved the designated boxes, the operator drives the transtacker to the Reserve Facility's mezzanine where the pallet holding the retrieved boxes is transferred onto one of the "unloading" conveyors located at the end of every other rack aisle. A forklift operator then retrieves the pallet of boxes from the "unloading" conveyors and transports the pallet to one of the distribution center's shipping buildings.
On its 1986 return, petitioner claimed an ITC for the costs of the entire Reserve Facility. The ITC, totaling $ 698,068, was based upon $ 6,980,676 in costs. Respondent disallowed $ 513,179 of the ITC with respect to $ 5,131,785.28 of these costs. Petitioner also claimed1997 Tax Ct. Memo LEXIS 198">*216 an ITC of $ 26,710 with respect to $ 267,102.37 in additional costs associated with the Reserve Facility on its 1987 return. Respondent disallowed $ 19,622 of this ITC. In addition, petitioner claimed a deduction on its 1986 and 1987 returns for depreciation on the entire cost of the Reserve Facility based upon the accelerated 5-year useful life method under section 168(b) (1). Petitioner also claimed on its 1986 return an interest expense deduction for all interest accrued during the construction of the Reserve Facility. None of this interest was capitalized under section 189 by petitioner.
The Mezzanine System consists primarily of lower level racks approximately 9 feet 6 inches high and a horizontal steel structure with plywood decking on top of the racks which creates an intermediate level between the two floors of petitioner's 1986 Shipping Building. Petitioner began construction of the Mezzanine System in 1985 and placed it in service in 1986 when construction was completed.
The design and the engineering for the 1986 Shipping Building were prepared by the architectural firm of Symmes, Maini and McKee Associates, Inc. (SMMA). In its design and construction1997 Tax Ct. Memo LEXIS 198">*217 of the 1986 Shipping Building, petitioner anticipated the construction of the Mezzanine System. The 1986 Shipping Building is a two-story building measuring 221 feet by 364 feet. The general clear floor height from the first floor of the 1986 Shipping Building to the underside of the second floor is 17 feet 4 inches. The Mezzanine System occupies approximately 219 feet by 290 feet of area in the 1986 Shipping Building.
The Mezzanine System was designed for the site and consists of a series of "off-the-shelf" items supplied by vendors and assembled (with bolts and boltless connectors and some welded connections) at the site. On the first floor of the 1986 Shipping Building, cantilever shelving attached to the rack posts of the Mezzanine System is used to hold petitioner's merchandise. Along the periphery of the building, where the lower level racks are not immediately adjacent to the building walls, lightweight rolled steel frames are used to support the mezzanine level in place of the racks. On the mezzanine level, independent shelving units sit on the plywood decking. In addition to the shelving units, there are some desks, enclosed work areas, a wire-mesh fenced area (which is 1997 Tax Ct. Memo LEXIS 198">*218 used for the storage of high value inventory), conveyors, and other equipment located on the mezzanine level. Electrical cables, ducts, communications cable, lighting fixtures, and sprinkler piping for the 1986 Shipping Building are connected to, or suspended from, the underside of the Mezzanine System. The 1986 Shipping Building has a concrete block enclosure on the first floor, which houses restroom facilities for petitioner's employees. An employee break area, accessible from the mezzanine and connected by flooring, is located on top of this concrete block enclosure.
Four freight elevators are located near the center of the 1986 Shipping Building. These elevators have stops at the first floor, mezzanine level, and second floor of the 1986 Shipping Building. A separate elevator, or pallet lift, is located in the southeast corner of the 1986 Shipping Building and also has stops at the first floor, mezzanine level, and second floor. One stairway next to the freight elevators provides access among the three levels of the 1986 Shipping Building. Several other stairways provide access between the mezzanine level and the first floor, and there is one other stairway between the mezzanine1997 Tax Ct. Memo LEXIS 198">*219 level and the second floor. The mezzanine level is also accessible from the adjacent 1979 Shipping Building through one interior doorway and one additional wall opening at the mezzanine level.
Conveyors pass through the mezzanine level from the second floor and from the 1979 Shipping Building. These conveyors carry customer orders that are ready for shipment. The conveyors also pass through openings in the masonry wall at the mezzanine level to the shipping platform on the north end of the 1986 Shipping Building. Some of the conveyors rest on and are partially supported by the mezzanine floor.
The ground-level racks, supporting columns, and stairways of the Mezzanine System are joined to the floor of the 1986 Shipping Building by bolts. Except for certain utility and flooring connections, the sides of the Mezzanine System are not attached to the 1986 Shipping Building. Instead, diagonal bracing is used to provide the required lateral support. Consequently, the Mezzanine System does not rely on the 1986 Shipping Building structure (other than the floor) for support, nor does it provide support for the 1986 Shipping Building. Use of this integrated storage and structural support system1997 Tax Ct. Memo LEXIS 198">*220 for the mezzanine floor level offers petitioner cost savings in reduced structural steel, reduced labor costs, and increased storage efficiencies.
The Mezzanine System is used to store merchandise for ready access and individual order picking in petitioner's distribution center. In the order picking process, petitioner's employees collect or "pick" individual items of merchandise from merchandise stored on shelves in order to fill a specific customer order. Merchandise is brought from other areas of petitioner's distribution center by forklift operators where pallets are either left on the first floor of the 1986 Shipping Building or sent up to a staging area on the mezzanine floor. Workers unload the pallets into carts and manually distribute the goods to specific locations on the Mezzanine's storage shelving.
Petitioner claimed an ITC for the cost of the Mezzanine System on its 1986 return. The ITC, totaling $ 169,706, was based upon $ 1,697,061.80 in costs associated with the components of the Mezzanine System. 8 Respondent disallowed this ITC in the amount of $ 60,985 with respect to $ 609,852.79 of these costs. In addition, petitioner claimed a deduction on its 1986 and 19871997 Tax Ct. Memo LEXIS 198">*221 returns for depreciation on the entire cost of the Mezzanine System based upon the accelerated 5-year useful life method under section 168(b) (1). Petitioner also claimed on its 1986 return an interest expense deduction for all interest accrued during the construction of the Mezzanine System. None of this interest was capitalized under section 189 by petitioner.
1997 Tax Ct. Memo LEXIS 198">*222 OPINION
The issue for consideration is whether petitioner is entitled to ITC's under
1997 Tax Ct. Memo LEXIS 198">*223 Petitioner bears the burden of proving its entitlement to the claimed credit. See Rule 142(a);
To qualify for an ITC, property must qualify as (1) In general.--* * * the term " (A) tangible personal property (other than an air conditioning or heating unit), or (B) other tangible property (not including a building and its structural components) but only if such property-- (i) is used as an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services, or * * * * (iii) constitutes 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), or
Thus,
The term "tangible personal property" is defined in 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). * * * 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, 1997 Tax Ct. Memo LEXIS 198">*225 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
To determine whether property is tangible personal property, we must first determine whether that property is a "building" within the meaning of any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purpose of1997 Tax Ct. Memo LEXIS 198">*226 which is, for example, to provide shelter or housing, or to provide working, office, parking, display, or sales space. The term includes, for example, structures such as apartment houses, factory and office buildings, warehouses, barns, garages, railway or bus stations, and stores. * * *
A.
We have examined photographs, blueprints, and videotapes of the Reserve Facility and have considered the testimony of the witnesses. The Reserve Facility is a structure of substantial dimensions that encloses space 10 surrounded by walls and covered by a roof. See
We must next consider whether the Reserve Facility functions as a building. The function test requires a determination as to "whether the purpose of the structure at issue is a purpose ejusdem generis to the purposes described by example in The definition in
Petitioner asserts that the primary function of the Reserve Facility is the efficient storage and retrieval of its inventory. Petitioner contends that the activities of its employees in the Reserve Facility are merely ancillary to this1997 Tax Ct. Memo LEXIS 198">*229 function. Relying on
Contrary to petitioner's interpretation, we do not examine the type of employee activity in a vacuum. Rather, the activity must be examined in relation to the "nature of the business venture housed within that structure."
Moreover, the cases cited in
We find that, unlike the structures in
Moreover, Buildings and structural components thereof are not eligible for the credit. The term "building" is to be given its commonly accepted meaning, that is, a structure or edifice enclosing a space within its walls, and usually covered by a roof. It is the basic structure of an improvement to land the purpose of which is, for example, to provide shelter or housing or to provide working, office, display, or sales space. The term would include, for example, the basic structure used as a factory, office building,
In light of Congress' expressed intentions, and because we find that the Reserve Facility functions essentially as a warehouse and the human activity involved therein is not merely incidental, we hold that the Reserve Facility is a building.
Petitioner contends that even if the Reserve Facility resembles a building and functions as a building, it is not an improvement to land because it is movable. In cases involving the issue of movability, we have approached the question of whether the property was tangible personal property by determining whether the structure was "inherently permanent". (1) Is the property capable of being 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? * * * (6) What is the manner of affixation of the property to the land? * * *
Petitioner's argument that the Reserve Facility is not inherently permanent rests primarily on evidence that a similar structure has been moved. Petitioner presented evidence that R.R. Donnelley & Sons Co. (Donnelley) moved a structure with a design similar to the Reserve Facility. The evidence shows that this structure was disassembled, moved approximately 350 feet, and reassembled. 1997 Tax Ct. Memo LEXIS 198">*235 This entire process took approximately 3 months. The relocation of the Donnelley facility did not include the concrete foundation.
The proper application of the
In the instant case, petitioner has failed to establish that either the design or the construction of the Reserve Facility indicates a lack of permanence. The Reserve Facility was specifically designed for the site as an addition to petitioner's distribution center. Construction of the Reserve Facility required extensive site work. The foundation 1997 Tax Ct. Memo LEXIS 198">*236 for the Reserve Facility, which petitioner concedes cannot be moved, also involved considerable effort and expense. Moreover the materials used and the method of construction further indicate the permanent nature of the Reserve Facility. Finally, petitioner concedes that it has no plans to move the Reserve Facility and that the time and effort involved, if it were to move the structure, would be substantial. In light of the evidence presented, we find that the Reserve Facility is inherently permanent and thus an improvement to petitioner's land.
Relying on
Petitioner's reliance upon
A more revealing comparison may be drawn with the facts of
However, we held that the proper application of
Moreover, we stated that if the purpose of the structural elements had been simply to support and assist the functioning of other property in the nature of machinery, we would have considered that fact as a further indication that the structural components and the machinery were so closely related that the structural components should be considered property in the nature of machinery. The structural elements in
Our inquiry in the instant case is thus not to consider whether the Reserve Facility as a whole constitutes property in the nature of machinery. Rather, the question presented is whether the individual structural elements of the Reserve Facility qualify as property in the nature of machinery which is eligible 1997 Tax Ct. Memo LEXIS 198">*241 for an ITC. The structural elements of the Reserve Facility are fixed in place and are similar to the structural elements involved in
Nevertheless, petitioner contends that it is entitled to an ITC for the separate components of the Reserve Facility individually, which include: (1) The storage rack system; (2) the superflat concrete slab; (3) the roofing and the wall panels; and (4) miscellaneous systems (consisting of heating, ventilation, electrical, and fire protection systems). Respondent, on the other hand, contends that these individual items constitute inherently permanent structural components of the Reserve Facility and, therefore, do not qualify as
The term "structural components" includes such parts of a building1997 Tax Ct. Memo LEXIS 198">*243 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. * * *
1.
The Reserve Facility does not have a standard column grid typically used to support the roof and the walls in a free-standing building. Instead, the storage rack system is the structural support for the Reserve Facility. Therefore, the storage rack system not only provides shelving1997 Tax Ct. Memo LEXIS 198">*244 for the storage of petitioner's merchandise; it also provides the primary structural support for the walls and the roof of the Reserve Facility. Petitioner contends, however, that the support function of the storage rack system is secondary to that of providing racks and shelving for storage, and, therefore, the racks are not a structural component of the Reserve Facility. Petitioner relies on
In
Here, we have previously determined that the storage rack system does not function as part of a machine. Additionally, we find that the storage rack system provides more than a mere "incidental" structural support function. Even if structural support is not the "primary" function of the racks, it is certainly more than "incidental" to their other functions.
Moreover, the storage rack system is a permanent part of the Reserve Facility. It is the main structural support for the Reserve Facility, a structure that we have already found to be inherently permanent. Without the storage rack system, the roof and most of the walls of the Reserve Facility would collapse. Therefore, we find that the storage rack system is an inherently permanent structural component of the Reserve Facility and does not qualify as
2.
Petitioner maintains that the concrete slab floor is also an item of machinery because it was specially designed to support the storage rack system and the transtackers. In support of this argument, petitioner again relies upon
We note that the Reserve Facility's concrete slab floor is thicker than a conventional warehouse floor. The thickness of the Reserve Facility's concrete slab floor is due primarily to petitioner's choice of structural support; i.e., the racks, which are not qualifying property. 11 However, we do1997 Tax Ct. Memo LEXIS 198">*248 not find that the thickness of the concrete slab was essential to the operation of petitioner's transtackers, which are qualifying property. Consequently, the function of the concrete slab floor as a structural component was not strictly incidental to its special design; rather, its function as a structural component of the Reserve Facility necessitated its special design.
Petitioner also argues that the concrete slab's special design is necessary for the efficient operation of the transtackers. The top surface of the concrete slab under the racks is constructed with an F100 or "superflat" finish, which is smoother and more level than a conventional concrete floor. The concrete slab floor, although modified for design considerations, is still clearly1997 Tax Ct. Memo LEXIS 198">*249 a structural component of the Reserve Facility. Petitioner has provided no meaningful method to allocate any portion of the total expense of the concrete slab floor to the cost of the superflat finish. Rule 142(a).
3.
Petitioner contends that, even if the roof and the wall panels might otherwise constitute parts of a building, these items still qualify for an ITC under a structure which houses property used as an integral part of an activity specified in
Petitioner argues that the exception provided in
4.
The remaining components1997 Tax Ct. Memo LEXIS 198">*251 of the Reserve Facility in issue are the electrical, heating, ventilation, and fire protection systems. While recognizing that these items are specifically included as examples of items which constitute "structural components" in Although we give great weight to respondent's regulations, it would be improper to read the words "electric wiring" in a vacuum and conclude that those electric cables, therefore, must be structural components. Rather, the effect of the final element of that same subparagraph, which reads "and other components relating to the operation or maintenance of a building," must be taken into account. That final element functions as a descriptive phrase intended to present the basic test used for identifying structural components. The preceding elements are examples of items which meet that test as a general1997 Tax Ct. Memo LEXIS 198">*252 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
In
Here, petitioner claims that 75 percent of the cost of the Reserve Facility's electrical system should be allocated to the electrical bus bar system for the transtackers. However, petitioner has not produced evidence demonstrating the percentage of electrical load attributable to the transtackers. Petitioner's unsubstantiated claim that 75 percent of the cost of the electrical system is attributable to the transtackers does not satisfy the "logical and objective" measurement required under
In addition, petitioner argues that no portion of the electrical system provides "general building services" due to the unusual design of the Reserve Facility. The fact that the design of the Reserve Facility may be unusual will not, by itself, prevent its electrical system from being defined as a structural component. The electrical system provides general building services such as lighting and power and is, therefore, a structural component of the Reserve Facility.
Petitioner contends that the plumbing and the sprinkler systems are not structural components, since they are built into and integrated with the rack system and1997 Tax Ct. Memo LEXIS 198">*254 are not suitable for providing general building services. Respondent maintains that the sprinkler system is listed as a structural component in the regulations and that its placement within the storage rack system is necessary because the water could not reach the lower levels due to the intervening merchandise on the shelves.
In
Petitioner contends that the heating system was designed to provide for the operation and the maintenance of the Reserve Facility's1997 Tax Ct. Memo LEXIS 198">*255 water-based sprinkler system and not for the comfort of petitioner's employees. Respondent argues that the heating system for the Reserve Facility is specifically excluded from the definition of "tangible personal property" under 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
B.
Petitioner also claimed an ITC for the costs of the Mezzanine System located on the ground floor of its two-story 1986 Shipping Building. The Mezzanine System occupies approximately 290 feet by 219 feet of the 1986 Shipping Building and consists of the following items: (1) Ground-level storage racks; (2) a horizontal steel structure joined to and mounted on the top of the ground-level racks; (3) plywood decking placed upon the horizontal structure that creates the mezzanine level; (4) additional racks and shelving located on the mezzanine level; 12 (5) additional columns and beams; (6) four one-piece stairway units connecting the first floor to the mezzanine level; and (7) steel 1997 Tax Ct. Memo LEXIS 198">*257 frames that support the plywood decking and the framing where there are no ground-level racks. Petitioner maintains that the Mezzanine System is not physically connected to the 1986 Shipping Building (other than the connections to the first floor of the building) and, therefore, cannot be a structural component of the 1986 Shipping Building. Furthermore, petitioner contends that the Mezzanine System's structural support was constructed using bolts and boltless connectors with a minimum of welded connections, which indicates that it was designed to be easily moved and not a permanent component of the 1986 Shipping Building.
Respondent argues that the Mezzanine System is inherently permanent and constitutes a structural component of the 1986 Shipping Building which does not qualify as
In determining whether an item is a structural component of a building, the permanency of that component has been considered an important factor. In
An examination of the evidence in this case indicates that the Mezzanine System is a fully integrated structural component of the 1986 Shipping Building. The 1986 Shipping Building was planned and designed with the integration of the Mezzanine System in mind. On this issue, the testimony of petitioner's manager of Facilities, Planning, and Engineering, James R. Helming, is particularly revealing: Q. Was Symmes, Maini & McKee [the architectural designers for the 1986 Shipping Building] involved with the -- A. They did not design the rack system or the mezzanine system. We gave them a drawing of the rack system that we were going to install into the space so that they knew how to place their lighting, how to place their sprinklers, how to place their mechanical systems. Q. Okay. They did design the lighting for the mezzanine, did they? And incorporated it in the overall lighting plan of the building. A. That's correct. Q. And they did that for the electrical service. A. That's correct. Q. And they did that for the heating. A. Right. Q. And the ventilation. 1997 Tax Ct. Memo LEXIS 198">*260 A. And, again, they were told at the initial design to plan capacity for the building, for the mechanical systems, the heating system and for the electrical system and for the sprinkler system, that, in the future, we would be adding the mezzanine level and that would require an additional level of lighting, an additional level of sprinklers, and an additional level of heat and ventilation.
Moreover, the construction and the integration of the Mezzanine System in the 1986 Shipping Building demonstrate the expectation that it would remain in place indefinitely. Electrical wiring, communications cables, sprinkler systems, and duct work for heating and ventilating are all attached to the Mezzanine System. In addition, the four freight elevators located near the center of the 1986 Shipping Building serve all building levels including a specific stop for the mezzanine level. Finally, openings are constructed in the masonry walls of the 1986 Shipping Building to provide access to the mezzanine level from the adjacent 1979 Shipping Building. Together, these factors indicate that the Mezzanine System is integrated with, and relates to, the operation or maintenance of the 1986 Shipping1997 Tax Ct. Memo LEXIS 198">*261 Building.
Nevertheless, petitioner contends that the Mezzanine System was designed to be flexible and that it will be removed in the near future to allow for changes in the operation of the 1986 Shipping Building. The evidence, however, reveals that petitioner did not change the Mezzanine System in any significant manner during the 10 years following its installation. Furthermore, petitioner estimates that the removal of the Mezzanine System components will take six to eight people a little over 1 month to accomplish. However, this estimate did not account for the time and effort required to disconnect the electrical wiring, communications cables, sprinkler systems, and duct work connected to the Mezzanine System. We find that the substantial time and effort involved in both the construction and potential removal of the Mezzanine System, as well as the degree of integration with the 1986 Shipping Building, further reflect the permanent nature of the Mezzanine System.
In view of the foregoing, we hold that the Mezzanine System is a structural component of the 1986 Shipping Building and, thus, not eligible for the ITC's in an amount exceeding that allowed by respondent. 13
1997 Tax Ct. Memo LEXIS 198">*262
1. Other adjustments set forth in the notice of final S corporation administrative adjustment are not in dispute.↩
2. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
3. Only the Mezzanine System and the Reserve Facility are in issue here.↩
4. Additional components of the Reserve Facility were placed in service in 1987.↩
5. Eighteen of the rows of racks are double-loaded.↩
6. Respondent has allowed petitioner an ITC for the transtackers, and those credits are not in issue in this case.↩
7. The transtacker manufacturer has modified its floor requirements for transtackers since petitioner completed the Reserve Facility.↩
8. Petitioner claimed an ITC on a Mezzanine System consisting of the following items: (1) Ground-level storage racks and cantilever shelving; (2) a horizontal steel structure joined to and mounted on the top of the ground-level racks; (3) plywood decking placed upon the horizontal structure that creates the mezzanine level; (4) additional racks and shelving rising from the mezzanine decking to a height of approximately 6 feet; (5) additional columns and beams; (6) four one-piece stairway units connecting the first floor to the mezzanine; and (7) lightweight rolled steel frames that support the plywood decking and framing at the northwest and southeast corners along the periphery of the Mezzanine System where there are no ground-level racks.↩
9. The investment tax credit was repealed by the Tax Reform Act of 1986, Pub. L. 99-514, sec. 211(a), 100 Stat. 2085, 2166, effective (subject to transition rules) for property placed in service after Dec. 31, 1985. The property's status as transition property is not in dispute.↩
10. Petitioner argues that the Reserve Facility does not enclose space, but, rather, encloses almost nothing except for the storage rack system. This argument ignores the obvious purpose for the racks; i.e., to allow petitioner to use the space within the Reserve Facility for the storage of its merchandise.↩
11. A conventional warehouse floor would require footings under the structural support columns. These footings would be thicker than the rest of the conventional floor slab. The size of the footings would depend upon the column loads and soil characteristics of the site.↩
12. The parties do not agree as to the extent, if at all, to which the costs of the racks and the shelving located on the mezzanine level are included in the actual costs of the Mezzanine System.↩
13. Petitioner does not argue that the individual items of the Mezzanine System are eligible for an ITC separately, and there is no evidence in the record that would allow us to allocate any cost to individual components of the Mezzanine System. We note, however, that respondent's notice of deficiency allowed a substantial portion of the ITC that petitioner claimed with respect to the racks in the Mezzanine System.↩
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