tcmemo_2012_67 united_states tax_court amerisouth xxxii ltd amerisouth texas iii llc tax_matters_partner petitioner v commissioner of internal revenue respondent docket no filed date matthew i root and jennifer s mcginty for respondent memorandum opinion holmes judge amerisouth xxxii ltd bought an apartment complex in for dollar_figure million the commissioner argues that with minor exceptions the apartment complex is one asset that amerisouth must depreciate over years amerisouth argues that whatever the apartment complex may look like to an untrained observer to a tax adept it is not a single asset but a collection of more than big_number components depreciable over much shorter periods it is usually the case that a shorter depreciation period benefits taxpayers it would certainly benefit amerisouth by generating hundreds of thousands of dollars’ worth of accelerated_depreciation deductions we are tempted to say this is why amerisouth throws in everything but the kitchen sink to support its argument--except it actually throws in a few hundred kitchen sinks urging us to classify them as special plumbing depreciable over a much shorter period than apartment buildings background this story begins with a limited_liability_company called amerisouth texas iii llc and its managing member and 100-percent owner ruel hamilton a real- estate veteran amerisouth texas is the general_partner in something like amerisouth partnerships dubbed amerisouth i through--the record’s a bit uncertain--amerisouth xlii plus a few with slightly different names each amerisouth partnership owns an apartment complex and over the years amerisouth texas has owned approximately big_number apartment units mostly in texas amerisouth management l p which hamilton also manages maintains at least some of these apartment complexes this case involves only one of the amerisouth texas partnerships amerisouth xxxii ltd amerisouth texas established amerisouth xxxii in to buy the garden house apartments garden house in mesquite texas built in garden house sprawls across more than acres of land and includes more than buildings most of which are two-story apartment buildings averaging nine apartments each the complex also has some common buildings--three pool cabanas a storehouse for mechanical equipment and a leasing office building most units are one to three bedrooms although there are a few four-bedroom units of its units approximately are fully-furnished guest apartments and even unfurnished units contain dishwashers and garbage disposals some units have laundry rooms and hookups for washing machines and dryers with their own plumbing and electrical connections there are also laundry areas with their own plumbing and electrical connections in some of the apartments for renters who either bring their own machines or rent them from amerisouth and for those renters who amerisouth xxxii bought garden house for dollar_figure million when amerisouth bought garden house rent ranged from dollar_figure to dollar_figure per month and occupancy stood pincite percent don’t rent or bring their own an outside company--coinmach--maintains washers and dryers in seven common laundry rooms these laundry rooms have floor drains plumbing and gas lines at least some of garden house’s units sport painted base molding a strip of wood at the base of the wall where it meets the floor crown molding same idea but at the ceiling and chair rail somewhere between the floor and ceiling and in this case usually only in the dining rooms besides chair rail the dining rooms also feature a built-in framed mirror and some have a ceiling light with a paddle fan some kitchens and living rooms have shelving set into the wall and about apartments have hardwood floors instead of carpeting garden house of course has electric and gas lines water pipes and sanitary sewers drawing from the main city lines underground though some electrical lines are overhead there are public access utility and sanitary-sewer easements running from the public street across amerisouth’s property to its buildings electricity flows into the complex from overhead lines down to an underground transformer on amerisouth’s property the transformer which amerisouth doesn’t own reduces the voltage in the wires to a residential level from there secondary electric lines carry the current to outdoor light posts and to main electrical panels on each building the wires split again after hitting the main panel and spider throughout the building behind the walls to panels in each apartment from there they run throughout each apartment where they end behind outlets and junction boxes for light fixtures at least one report shows that many of garden house’s electric panels aren’t properly labeled renters plug into the electricity via many outlets scattered throughout the buildings each apartment’s kitchen has a duplex two-prong outlet four feet above the ground behind the refrigerator and a three-prong 220-volt outlet for the sole purpose of powering the stove there are also duplex outlets above the countertops presumably for small kitchen appliances in apartment units with laundry areas there is a duplex outlet where the clothes washer may be installed and a three-prong 220-volt outlet for the clothes dryer the common laundry rooms have typical electric outlets in areas designed for clothes washers while the office building has duplex outlets in places convenient for office and exercise equipment and there are specialized outlets for cable lines data lines and telephones in apartments and the office building each apartment and the office building has a stainless steel kitchen sink and there is a plastic utility sink in the office building as well garbage disposals are set into one of the drains of the kitchen sink in each apartment unit and the office building so that the waste piping connected to the garbage disposals carries away the water and waste coming from the kitchen sinks the garbage disposals are electric and plug into electric outlets located near them the dishwashers also plug into electric outlets but they have their own smaller water lines that branch off from the main water line as soon as amerisouth bought garden house it began a dollar_figure million renovation of the apartments that included replacing cabinets and countertops dishwashers garbage disposals vent hoods and kitchen sinks as it prepared to file its information_return amerisouth needed to decide how to report its income and expenses one major expense it faced was depreciation apartment buildings generally get depreciated over years and amerisouth originally listed garden house as 5-year_property in its records before it filed its information_return however amerisouth scouted out a more advantageous position it hired ms consultants to do a cost-segregation study ms visited garden house and mentally deconstructed it into over big_number parts ms advised amerisouth that items such as sinks outlets paint and the electric wiring connected to garbage disposals could be depreciated not as part of the buildings they were attached to but by themselves because a sink for example has a shorter expected life span than an apartment building depreciating these components separately would have sped up garden house’s depreciation considerably leading to lower taxes for amerisouth ms calculated that about dollar_figure million of amerisouth’s property could be depreciated over or years instead of this increased amerisouth’s depreciation deduction by approximately dollar_figure in dollar_figure in and dollar_figure in ms boasted that its plan for garden house would defer taxes of almost dollar_figure for through the cost-segregation study separated the components at issue into the following categories site preparation and earthwork water-distribution system sanitary-sewer system gas line site electric special hvac special plumbing special electric the parties adopt these categories for ease of discussion and so will we without attaching any legal significance to the titles hvac means heating ventilating and air conditioning finish carpentry millwork interior windows and mirrors and special painting amerisouth took ms’s advice reporting depreciation on its returns as follows year depreciation expense dollar_figure big_number big_number amerisouth claimed on its returns that the water-distribution and sanitary- sewer systems the gas lines and the site electric were eligible for 15-year depreciation it claimed property in the other categories was eligible for 5-year depreciation the commissioner disagreed reasoning that some of the parts amerisouth wants to depreciate quickly can be depreciated only as pieces of a whole building that it must depreciate more slowly over years and that some of the parts that amerisouth wants to depreciate aren’t depreciable at all he issued final_partnership_administrative_adjustment sec_4 for and denying deductions of dollar_figure dollar_figure and dollar_figure respectively the commissioner raised one more argument for the first time at trial--that amerisouth was also trying to depreciate some assets it doesn’t even own amerisouth texas as amerisouth’s tmp filed a petition to challenge the commissioner’s adjustments and we tried the case in buffalo new york the default appellate venue however is likely the fifth circuit because amerisouth’s principal_place_of_business was in dallas texas when the petition was filed see sec_7482 partnerships themselves don’t actually pay income tax--instead each partner reports a pro-rata portion of the partnership’s income on his individual tax_return to try to reach consistent results among partners and decrease the cost of auditing partnership returns congress enacted the tax equity and fiscal responsibility act of tefra pub_l_no sec_402 stat pincite under tefra the commissioner audits a partnership at the partnership level if the commissioner makes any adjustments to partnership items after concluding the partnership-level audit he issues a final_partnership_administrative_adjustment to alert the partners each tefra partnership is supposed to designate one of its partners as tmp--tax matters partner--to handle tefra issues and litigation for the partnership amerisouth texas is amerisouth’s tmp unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue and rule references are to the tax_court rules_of_practice and procedure adding another twist amerisouth sold garden house about the time the case was tried and stopped responding to communications from the court the commissioner and even its own counsel we suspended briefing in an attempt to figure out what was going on and ended up ordering amerisouth to show cause why its attorneys should not be allowed to withdraw from its case without any response to the court we granted the attorneys’ motion to withdraw and so amerisouth has been left representing itself the court then ordered amerisouth to file a posttrial brief which it never did because the court ordered a posttrial brief and amerisouth didn’t file one we could dismiss this case entirely see rule sec_123 sec_151 84_tc_693 aff’d without published opinion 789_f2d_917 4th cir despite amerisouth’s lack of response and mysterious disappearance however we will not do so we will though deem any factual matters not otherwise contested to be conceded see diesel country truck stop inc v commissioner tcmemo_2000_317 discussion the details of depreciation spur many to more interesting pastures but the basic concept is easy to understand a general goal of taxation is to match the income and the expenses associated with producing that income see 503_us_79 in this way taxes more closely reflect economic profit items that are bought and used in the same year are easily identified as deductible costs related to that year and smaller expenses even if for items that last longer than a year are often deductible rather than depreciable just because it is too cumbersome to keep track of each pencil or paperclip yet a taxpayer who buys longer lasting more expensive items like manufacturing equipment may have a large cash outlay in one year that will help produce income for many years to come without some sort of allocation the economic wear_and_tear of the equipment will not offset that future income--instead the taxpayer would have an inflated loss in the year he bought the equipment and that’s what depreciation recognizes--taxpayers take reasonable deductions against income for the exhaustion and wear_and_tear of property used in a trade_or_business or held_for_the_production_of_income see sec_167 in this way taxpayers recover the cost of their investments as they are used and because depreciation is an accounting creation that reflects gradual wear_and_tear and not the initial cash expense it follows that assets that cost money but don’t suffer from wear and tear--like land--are not depreciable see sec_1_167_a_-2 income_tax regs so much for theory applying depreciation in the real world can be more difficult this is in part because it uses a very specific but not-so-intuitive vocabulary for example to calculate a depreciation deduction a taxpayer must first determine the basis of an asset usually its cost at least initially see sec_1011 sec_1012 sec_1016 as well as the asset’s class_life --a range of years reflecting the anticipated useful_life of that type of property to a particular industry or other group see sec_168 then the method_of_depreciation determines the amount he can deduct each year for property placed into service after and all property in this case the code generally requires the use of the modified accelerated_cost_recovery_system macrs see tax_reform_act_of_1986 pub_l_no secs stat pincite the first step in using macrs is classifying the assets to determine the proper recovery_period this is what amerisouth and the commissioner are fighting about here macrs provides lists of the appropriate classifications for some specific assets see sec_168 race horses older than two years when they are placed into service for instance are specifically listed as though garden house was built in amerisouth first placed it in service by buying the complex in so macrs applies to all property in question see 137_tc_25 an asset is placed_in_service when it is acquired and put into use by the taxpayer 3-year_property sec_168 if an asset doesn’t fit into one of the listed categories then the taxpayer must classify the asset by class_life see sec_168 for example an otherwise unclassified asset expected to last more than four years but less than ten would be 5-year_property id once an asset is classified macrs then tells us the applicable_depreciation_method and recovery_period see sec_168 and c residential_rental_property commands its own category macrs specifically requires use of the straight-line method and a recovery_period of years see sec_168 c this means that amerisouth can deduct a portion of garden house’s basis over the course of years but what is garden house for purposes of macrs amerisouth argues that garden house is not only apartment buildings--which both parties agree are residential rental property--but apartment buildings with over a thousand pieces of tangible_personal_property that just happen to be attached this classification resting on ms’s cost-segregation study posits that these pieces are 5-year and macrs also provides the applicable convention which helps a taxpayer determine when it may start depreciating an asset that was placed into service part way through a tax_year see sec_168 d don’t worry about this wrinkle--it’s a term of the depreciation equation that’s not in dispute the depreciation clock for residential_rental_property begins in the middle of the month it is placed_in_service see sec_168 year property--for which the code mandates recovery periods of and years respectively and directs the use of declining-balance_depreciation methods see sec_168 and c declining-balance methods allow taxpayers to take higher depreciation_deductions in the earlier years of an asset’s life which would further accelerate amerisouth’s recovery_of its costs in the case of 5-year_property a taxpayer would start by using the double- declining-balance ddb method until switching to the straight-line sl method would become more advantageous see sec_168 and then there’s the alternative_minimum_tax that parallel tax system that applies nearly flat rates but strips out favorable tax deductions and exemptions which if applicable would require a taxpayer to make depreciation_adjustments based on the 150-percent- declining-balance 150db method see sec_56 consider a simplified example that ignores some conventions for simplicity’s sake if the 5-year_property costs dollar_figure the sl method evenly allocates the cost over the five years--dollar_figure per year or percent of the total cost the percent is the initial sl rate but when looking at the depreciable balance--the cost of the property minus previously deducted depreciation--that rate changes thus in the second year the dollar_figure of depreciation i sec_25 percent of an dollar_figure balance dollar_figure cost minus year-one depreciation a similar calculation yields a percent sl rate in year three percent in year four and percent ie the remaining balance in the final year the taxpayer-friendly 150db and ddb methods take the first-year sl rate of percent and multiply it by a factor of and respectively they then multiply the resulting percent and percent rates by the depreciable balance each year until it becomes more favorable to apply the sl rate in a given year thus in this example under the 150db method the sl rate would apply beginning in year the commissioner on the other hand argues that all of the property in question is residential_rental_property he says the components in question are integral to the apartments’ operation and maintenance and should thus be classified as structural_components depreciable over the life of the buildings but the commissioner first tries to ride down and tie up a few dogey arguments--claiming that amerisouth is trying to depreciate some assets it doesn’t even own and some other assets that it does own but that just aren’t depreciable we deal with these first i amerisouth’s depreciable interests the commissioner argues that amerisouth doesn’t own or bear the replacement risk for the gas water and sewer lines and therefore it isn’t entitled to depreciate their cost he also argues that amerisouth’s claimed site preparation and earthwork if it even occurred relates to the land and so is not depreciable a depreciation of utility lines the commissioner now asserts that amerisouth doesn’t own portions of the water-distribution system sanitary-sewer system gas line and underground site electric which we’ll just call the utility lines and therefore can’t depreciate them the commissioner makes the same argument regarding the overhead electric lines because the commissioner has raised these questions for the first time at trial he bears the burden_of_proof see rule a for a taxpayer to depreciate an item he must bear the loss when that property wears out see 308_us_252 so even if amerisouth owns certain property if someone else repairs or replaces it amerisouth can’t properly claim a deduction because it isn’t financially hurt by the wear_and_tear see 47_tc_340 d epreciation is not predicated upon ownership of property but rather upon an investment in property the parties provide an abundance of information about what typically occurs and who generally owns or repairs utility lines but are more reticent with information about who owns or repairs the utility lines garden house actually uses amerisouth claims that developers typically pay for and install utility lines such as those in this case and so it should be entitled to depreciate them to recover its predecessor’s investment the commissioner points to the fact that the lines are located underground within a sanitary sewer easement held by the city of mesquite and also introduces evidence of a general utility easement which grants all public_utilities full right of ingress and egress for the purpose of constructing reconstructing inspecting patrolling maintaining and adding to or removing all or part of its respective systems on amerisouth’s property all of this the commissioner claims proves the underground utility lines do not belong to amerisouth and even if they did belong to amerisouth he argues that amerisouth does not bear the loss of its predecessor’s investment because the city takes care of repairs and replacementdollar_figure utility-lines ownership we do find that mesquite holds an easement for constructing operating and maintaining a sanitary sewer main across amerisouth’s property and that the utility lines are physically within this easement though the evidence the parties have produced suggests that public_utilities have the right to construct and maintain water mains and gas and electric lines it does not show if that is what actually happened the commissioner doesn’t provide nor do we find any indication that under texas law an easement holder owns all property found within that easement therefore we cannot find that the mere location of the utility lines within the easement proves that amerisouth doesn’t own them while such a result seems harsh this nondepreciable interest--similar to one in land--will create a tax_benefit upon disposition at which point its tax basis offsets the amount_realized see 148_fsupp_938 s d cal we do believe however that the commissioner has met his burden with respect to the sanitary-sewer system for this he demonstrates that mesquite obtained an easement before the apartments were erected for the specific purpose of installing operating and maintaining a sewer system we find this to be more probative than the simple fact that there was a general utility easement on amerisouth’s property while amerisouth could rebut that evidence by showing that it owned the sewer main it has not done so and we thus deem this issue conceded finally we have to answer the question of whether amerisouth owns the overhead electric lines the commissioner notes that a survey of amerisouth’s property states that the overhead electric lines encroach on the property and he deduces the overhead lines must not belong to amerisouth because one’s own property wouldn’t encroach upon itself this would put a heavy load on a single word but he also more persuasively points out that amerisouth admits that it does not own the transformers that handle the electric load in the lines these transformers are smack in the middle of those lines on this somewhat undertried issue that will have to do we find it more_likely_than_not that if mesquite owns the transformers it also owns the lines entering and exiting the transformers responsibility to repair though the commissioner doesn’t satisfy his burden as to the ownership of the water-distribution system the gas line and the underground portion of site electric he alternatively claims that even if amerisouth technically owns the property it can’t take a depreciation deduction because it doesn’t pay for repairs he notes that utility companies have used the access easements for repair work we agree with the commissioner that from the property line to the gas water and electric meters the city or utility companies are responsible for the repair of utility lines--amerisouth’s manager admitted as much but since amerisouth’s responsibility for repair begins once the utility line reaches the gasket meter on its side of the meter we must still decide whether the lines between the meters and the buildings are structural_components see infra pp b site preparation and earthwork ms’s cost-segregation study allocates dollar_figure of garden house’s depreciable basis to site preparation and earthwork depreciable over years as a land improvement the study later refers to the same expenses as site development but nowhere describes what work is included in this category amerisouth has submitted an exhibit that claims these expenses relate to land improvements for excavating grading stone bases and compaction needed to construct sidewalks parking and driveways but the commissioner’s expert claims that ms’s workpapers show the expenses relate to the initial clearing and grubbing ie tree removal of the land before the apartments’ construction in the commissioner also says that amerisouth hasn’t proven that the claimed improvements to land ever actually happened--for example the commissioner notes the land could have been treeless in the first place and the commissioner argues that even if the work did happen clearing and grubbing isn’t depreciable because it’s not subject_to wear_and_tear and generally makes the land more valuable this may overstate the matter a bit while land generally isn’t depreciable sec_1_167_a_-2 income_tax regs improvements to land or physical preparations for land development may be depreciable if they are closely associated with a depreciable asset langer v commissioner tcmemo_2008_255 aff’d 378_fedappx_598 8th cir see also revrul_65_265 1965_2_cb_52 clarified by revrul_68_193 1968_1_cb_79 costs for earthwork in preparation for buildings or paving roadways are depreciable if site preparation is inextricably associated with the land itself however it is not depreciable 29_tc_1205 thus the depreciability of site improvements hinges on whether they relate to a depreciable asset or just to the land itself this is a question of fact and on this question of fact we find for the commissioner his determination has a presumption of correctness and amerisouth has the burden to overcome that presumptiondollar_figure see rule a 290_us_111 amerisouth also failed to address this issue at trial and failed to file a posttrial brief the only place amerisouth refutes the commissioner’s determination is in an expert report about ms’s cost- segregation study which cites the deposition of philip mann the head of ms the report limits itself to a description of the assets and legal conclusionsdollar_figure the commissioner’s expert relied on ms’s workpapers to prepare his own report ms created these workpapers contemporaneously with its study and we find the commissioner’s expert more reliable for relying on them we note that amerisouth failed to put these workpapers into evidence to undermine the in its petition amerisouth suggests that the burden_of_proof shifts to the commissioner see sec_7491 but under sec_7491 amerisouth has to put forth credible_evidence before the burden can shift and it failed to do so at trial the expert eric ernst of ernst consulting group inc states that the site development included clearing grading and over seeding but amerisouth does not provide supporting facts ernst cites the deposition of philip mann the head of ms but that deposition was never admitted into evidence commissioner’s characterization of what they held we therefore sustain the commissioner’s determination that the costs related to initial clearing and grubbing of the land are nondepreciable it’s certainly plausible that some of the pre-1970 site preparation relates to sidewalks parking and driveways and may therefore be depreciable but amerisouth has presented no evidence on this point in this context--or lack of context--we cannot uphold amerisouth’s allocation between the costs of land and site preparation see aurora vill shopping ctr inc v commissioner tcmemo_1970_39 we therefore sustain the commissioner’s determination that the claimed site preparation and earthwork is nondepreciable ii classifying property amerisouth and the commissioner don’t dispute which recovery_period applies to each property class but instead disagree upon the appropriate classification of various items the commissioner claims all of the property in question is part of the apartment buildings and therefore should be classified as residential_real_property amerisouth argues that many components should be classified as tangible_personal_property in analyzing the situation we find ourselves facing a llano estacado with only such ambiguous landmarks as tangled statutory cross-references some to repealed sections of the code definitions by both example and negation and extremely fact-specific caselaw to guide us a traversing the code we set off with the code sec_168 defines when a building is residential_rental_property but does not define with precision what a building is so we look instead for guidance on what tangible_personal_property means first sec_168 tells us to classify property on the basis of its class_life and sec_168 sends us to sec_167 as in effect before its repeal to determine what that isdollar_figure former sec_167 gave the secretary authority to provide guidance on the class lives for each class of property so taxpayers can compute their depreciation expenses every so often the secretary amends the asset classes and periods that determine class lives and publishes the new ones in a revenue_procedure see sec_1_167_a_-11 income_tax regs the revenue_procedure in effect for the years at issue is revproc_87_56 1987_2_cb_674 the stated purpose of revproc_87_56 is to set forth the class congress repealed sec_167 in see omnibus budget reconciliation act of obra pub_l_no sec a stat pincite but sec_168 still incorporates that section’s pre-repeal language and treats the taxpayer as if it elected to have that section apply before the repeal sec_167 essentially codified the asset_depreciation_range_system found in sec_1_167_a_-11 income_tax regs lives of property that are necessary to compute the depreciation allowances available under sec_168 of the internal_revenue_code see revproc_87_56 sec_1 c b pincite to accomplish this purpose revproc_87_56 sec_5 c b pincite describes certain classes of property and their recovery periods and lists other asset classes along with their class lives and appropriate recovery periods in a twelve-page table if an item doesn’t fall within that section or the table or is not otherwise provided for by statute then the property is treated as having no class_life id sec_2 c b pincite revproc_87_56 sec dollar_figure reiterates that residential_rental_property has a recovery_period of years amerisouth relies on two classifications within revproc_87_56 for its claimed tangible_personal_property asset class land improvements depreciable over years and asset cla sec_57 distributive trades and services depreciable over years dollar_figure it includes its water-distribution system sanitary-sewer system gas lines revproc_87_56 1987_2_cb_674 incorporates and updates many items from revproc_83_35 1983_1_cb_745 and replaces that revenue_procedure for property subject_to sec_168 see revproc_87_56 sec_5 c b pincite the use of asset cla sec_57 presents a paradox its description-- assets used in wholesale and retail trade and personal and professional services --does not seem to describe the property at issue but in applying the definition of 5-year_property from a former version of sec_168 see sec_168 as in effect before the tax_reform_act_of_1986 tra pub_l_no stat we have held that a microwave and range used for rental property are 5-year continued and site electric in the former category placing everything else in the latter but asset class excludes buildings and structural_components as defined in sec_1_48-1 of the regulations id c b at dollar_figure continued property subt v commissioner tcmemo_1991_429 that superseded language of former sec_168 survives in sec_1 c proposed income_tax regs fed reg date and the irs has clarified that certain personal_property used in a rental-real-estate activity does fall under asset cla sec_57 see i r s announcement 1999_2_cb_244 date updating form with this background in mind and because amerisouth and the commissioner stipulate that asset cla sec_57 describes amerisouth’s business we won’t further poke around at the proper classification of amerisouth’s tangible_personal_property if it turns out not to be residential_real_property revproc_87_56 is filled with references to sec_1245 property and sec_1250 property sec_1245 property includes personal_property that is or was subject_to sec_167 depreciation sec_1245 sec_1250 property includes any real_property that is or was subject_to sec_167 depreciation and that is not sec_1245 property sec_1250 a look at sec_1245 and sec_1250 with their accompanying regulations confirms that sec_1_48-1 income_tax regs is our proper destination depreciable_personal_property is sec_1245 property see sec_1245 sec_1245 in turn looks to sec_1_48-1 income_tax regs see sec_1 b income_tax regs to define tangible_personal_property tangible_personal_property includes all property other than structural_components which is contained in or attached to a building sec_1_48-1 income_tax regs emphasis added structural_components are sec_1250 property see sec_1_1250-1 income_tax regs sec_1_1245-3 income_tax regsdollar_figure and we can in general ask whether the property in question is sec_1245 property or sec_1250 property under acrs sec_168 assigns a classification and corresponding recovery_period to property based on whether it is sec_1245 class property or sec_1250 class property see sec_168 as in effect before tra sec_168 under macrs no longer uses that language and instead assigns property to recovery periods based on class lives see sec_168 e but the distinction between the two types of property continues to be relevant under macrs see 109_tc_21 sec_1_1245-3 income_tax regs refers to a category of sec_1245 property coined other_property which is distinct from personal_property nonetheless for the purpose of defining structural_components sec_1_1250-1 income_tax regs detours us through that subsection to arrive at the relevant definition sec_1_48-1 income_tax regs provides the relevant definition of structural_components but upon finally arriving at sec_1_48-1 income_tax regs our journey takes a bit of a detour--we have an extant regulation derived from an extinct statutory framework the regulation is entitled definition of sec_38 property referring to former sec_38 which dealt with the investment_tax_credit itc dollar_figure as a result we also look to caselaw interpreting the itc to determine whether sec_1_48-1 income_tax regs classifies amerisouth’s property as structural_components for purposes of depreciation 109_tc_21 there is an explanation to the apparent numerical incongruence before a amendment sec_48 defined sec_38 property see sec_48 as in effect before obra before its repeal the itc allowed taxpayers to recoup a portion of expenses invested in their business rewarding the taxpayer for capital expenditures on equipment and machinery--seen as a boost to production and thus economic growth--but not for the outlays on the buildings that housed the equipment and machinery see eg 74_tc_137 b the caselaw sec_1_48-1 income_tax regs defines building and structural_components the commissioner and amerisouth agree that the apartments are buildings but disagree about what a structural_component is sec_1_48-1 income_tax regs says 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 emphasis added thus we ultimately look to see if an item--whether inside or outside the building--relates to the operation or maintenance of a building to determine if it’s a structural componentdollar_figure see 74_tc_137 there is an exception an item that would otherwise be a structural_component will be considered tangible_personal_property under sec_1_48-1 income_tax regs if the sole justification for its installation is to meet temperature or humidity requirements which are essential for the operation of other machinery or the processing of materials or foodstuffs sec_1_48-1 income_tax regs neither party argues that this applies to any property in this case ndollar_figure the catchall language in the final phrase modifies the specifically listed items so that even they in unusual circumstances are tangible_personal_property when not relating to the overall operation or maintenance of a building id pincite the cases that have slogged through this operation-or-maintenance-of-a- building morass have left a mess of hoof marks that sometimes makes it hard for us to follow the right trail and while always acknowledging the caselaw’s emphasis on the unique circumstances of each case we navigate by relying on three prominent landmarks--whether an asset is accessory to a business permanent or ornamentation accessory to a business one tool in our saddle bag comes from the senate report accompanying the itc 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 investment_tax_credit s rept no 1962_3_cb_707 emphasis added one context in which courts have largely applied an accessory-to-a-business analysis is when property arguably serves a function specific to a taxpayer’s business see hosp corp t c pincite describing certain five-year_property morrison inc v commissioner tcmemo_1986_129 aff’d 891_f2d_857 11th cir handrails are thus accessory to a hospital’s healthcare-service business when placed in a corridor to aid patients see hosp corp t c pincite and outside lights are accessory to a psychiatric facility’s business when installed to prevent unwanted departures by patients and to reassure residents in the area about security see metro nat’l corp v commissioner tcmemo_1987_38 property used directly with specific pieces of equipment may also be accessory to a business22--because an item that specifically serves a piece of equipment is not generally serving the building in which that equipment is placeddollar_figure see eg hosp corp t c pincite citing examples of property that was necessary to and used directly with specific pieces of equipment and consequently did not relate to general building operations this analysis came from scott we classified water piping that was set in the concrete beneath a cafeteria kitchen for example as tangible personal property--even though the piping could be adapted for use by other businesses--because it actually served the taxpayer’s kitchen equipment and machinery morrison inc v commissioner tcmemo_1986_129 aff’d 891_f2d_857 11th cir because the property relates to equipment which in turn relates to the taxpayer’s business the property is deemed accessory to a business see hosp corp t c pincite paper co v commissioner 74_tc_137 where we had to decide whether a manufacturer’s primary-electric improvements qualified for the investment_tax_credit in scott we looked to the ultimate use of power and held that power used to meet the demand of process machinery is not used in the overall operation or maintenance of a building see id at dollar_figure we have extended the reasoning of scott to drain gas and water lines which serve a restaurant owner’s equipment see duaine v commissioner tcmemo_1985_39 to water piping that is connected to kitchen machinery and equipment in a cafeteria see morrison tcmemo_1986_129 w e conclude that the kitchen water piping is necessary to and is used directly with specific pieces of equipment and to electrical wiring outlet receptacles and other_property which power television sets in a hospital see hosp corp t c pincite if in contrast a component is connected not with specific equipment but with a structural_component of a building we are likely to classify it as part of that building see metro tcmemo_1987_38 toilet partitions had clear relation to if the item serves both the taxpayer’s equipment and the building generally eg electric wiring taxpayers may accelerate depreciation of an item to the extent equipment usage makes up total usage see eg hosp corp t c pincite plumbing facilities see also hosp corp t c pincite 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 76_tc_609 permanence we also have to evaluate the permanence of the component although permanence is not always an overriding factor see hosp corp t c pincite 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 morrison tcmemo_1986_129 kitchen water piping--tangible personal property-- was set in concrete we have considered it in the accessory-to-a-business context see metro tcmemo_1987_38 finding that cabinets used for tenants’ business needs which could be easily moved qualified as tangible_personal_property of course permanence is also a key factor for items that do not serve a function unique to a taxpayer’s business--such as carpet and wall and floor coverings see hosp corp t c pincite see also s rept no pincite 1978_3_cb_321 but nothing human lasts forever moving us to ask how permanent must a component be to have permanence our cynosure is 65_tc_664 in whiteco we considered six factors whether the property is capable of being moved and whether it had in fact been moved whether the property is designed or constructed to remain permanently in place whether there are circumstances which tend to show that the property may or will have to be moved whether removal of the property would be a substantial and time- consuming job the damage the property would sustain upon removal and the manner of affixation of the property to the land id pincite cases after whiteco have finessed its basic structure the ease and frequency of moving the item in question helps determine its permanence see eg hosp corp t c pincite but movability is not a controlling factor metro tcmemo_1987_38 noting that some of the examples of structural_components in the regulation are readily removable other indicia include the function and design of the component the intent of the taxpayer in installing the component the effect of the component’s removal on the building and the extent the component can be reused after removal 708_f2d_1385 9th cir citing whiteco t c pincite aff’g in part rev’g in part 74_tc_768 mallinckrodt inc v commissioner tcmemo_1984_532 aff’d 778_f2d_402 8th cir ornamentation because amerisouth also argues that several items serve as decoration we note an additional consideration listed in s rept no pincite c b vol pincite t angible personal_property includes special lighting false balconies and other exterior ornamentation that have no more than an incidental relationship to the operation or maintenance of a building thus lights serving to accentuate the shrubbery outside of a building qualify as tangible_personal_property falling squarely within the language of s rept metro tcmemo_1987_38 see also morrison tcmemo_1986_129 deciding after considering various factors that the taxpayer’s lattice millwork served as decorative ornamentation and thus was tangible_personal_property and there remains one more tangle of brush that we still need to clear a major part of the parties’ disagreement is about the appropriate benchmark for garden house--do we compare it to an apartment building or a more generic building in other words should the court look to see if the items in question relate to the structure maintenance or operation of a typical apartment building or to the structure maintenance or operation of a generic shell building c defining amerisouth’s building amerisouth argues that garden house should be compared to a shell building when we decide what is necessary for its operation and maintenance or in other words when we determine what is a structural_component in amerisouth’s view the only items that are structural_components are those that are necessary to provide general lighting heating cooling and electricity to a nondescript building the commissioner on the other hand argues that the rule is more specific he says garden house should be compared to a typical apartment building and therefore anything that is typical of an apartment building should be a structural_component like all the other factors that the parties point at to guide our way the definition of a building has been a factor but not necessarily a deciding factor in other cases see eg morrison tcmemo_1986_129 finding restroom accessories serve d no function particularly unique to a cafeteria perhaps what makes it so inviting for the parties to put this issue under the microscope in this case is the context residential_real_property which rarely would have qualified for the old itc in contrast to commercial buildings which can house many different types of businesses residential_real_property contains but one providing lodging and accessories to tenants if typicality governs one would be hard pressed to find any unique components in a rental apartment building we nevertheless think that amerisouth is wrong to argue that we should use a barebones building as our base linedollar_figure sec_1_48-1 income_tax regs explicitly lists items that are not common to all buildings--eg stairs escalators elevators and bathtubs we read this as the regulation’s telling us to take into account the type of building that the components are part ofdollar_figure see eg metro tcmemo_1987_38 w e are looking at the structure of the building ascertaining the components relating to the operation and maintenance of a building as rental space emphasis added we note that several of rev_proc 87-56’s predecessors used the word shell to describe a building see revproc_72_10 1972_1_cb_721 revproc_62_21 1962_2_cb_418 but even assuming that modifier sheds light on the area it still begs the question whether we look at the shell of a generic building or the shell of an apartment building in defining building the regulation also notes various building purposes sec_1_48-1 income_tax regs so we will start by asking whether a component relates to the operation or maintenance of an apartment building but we can’t stop there though amerisouth would find it difficult to argue that any of the contested components is unique to its business amerisouth might be able to show that some components are not permanent see eg hosp corp t c pincite seeing nothing unique about bathroom accessories but still applying a permanency analysis to determine whether they are structural_components or that they serve specific items of equipment rather than the building generally see morrison f 2d pincite components of primary electrical systems that supply electricity to the overall operation or maintenance of a cafeteria building do not qualify for the investment_tax_credit but components that distribute electricity to non-structural components of the taxpayer’s business do we now have at least a rough map to guide us in exploring amerisouth’s depreciation claims which we look at in the same order the parties used iv depreciable lives a water-distribution system the commissioner and amerisouth calculate the water-distribution-system’s depreciation differently year total per irs dollar_figure big_number big_number big_number per amerisouth dollar_figure big_number big_number big_number amerisouth’s water-distribution system includes the water and fire lines fire hydrants and trenching and backfill amerisouth describes trenching and backfill as excavating soil where the utility will lay water lines testing the soil and ensuring it’s suitable laying the lines and then replacing the excavated soildollar_figure it argues that the lines running from the municipal water main to the buildings are tangible_personal_property with a recovery_period of yearsdollar_figure the commissioner to the extent amerisouth owns the water-distribution system it’s a trenching and backfill also affects depreciation of the sanitary-sewer system the gas line and site electric because builders install those components in ways very similar to the way they install a water-distribution system only a portion of the lines is still at issue the water-distribution system along with the sanitary-sewer system and gas-line categories includes lines that run from an off-site source to meters on the property and then from the meters to the building because we have already decided amerisouth does not own the lines until they reach the meters it can depreciate the lines only to the extent they run from the meters to the buildings how fast it can depreciate these lines is the issue we decide structural_component of the buildings and therefore depreciable only over years it is clear to us that the water-distribution system is an integral part of the buildings’s plumbing and air-conditioning systems and also serves the building generally by providing potable water see samis t c pincite thus amerisouth’s argument that the water-distribution system could service the land appears to hinge solely on the fact that it is outside the building but that fact does not affect our finding that the components relate to the operation and maintenance of the apartments see scott t c pincite ndollar_figure property can relate to the overall operation and maintenance of a building even though it is not located within the building accordingly amerisouth must depreciate the water-distribution system’s components over the life of the apartment buildings b sanitary-sewer system year total depreciation per irs depreciation per amerisouth dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number the sanitary-sewer system includes sewer lines extending from the buildings to the municipal sewer sewer manholes and the trenching and backfill for those lines we have already found that amerisouth can’t depreciate the sanitary-sewer system but we also find that amerisouth fails to distinguish these components from those of the water-distribution system amerisouth’s trial witness states a general purpose for the system-- a ll your drains everything inside the building goes in the sanitary system because the system serves the building generally even if it were owned by amerisouth it would be part of the buildings c gas line year total depreciation per irs depreciation per amerisouth dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number the gas lines are similar under the gas line category amerisouth includes both gas lines that extend from the utility source to the buildings and the cost of trenching and backfill these gas lines do not materially differ from the other utilities the only additional argument we glean from the record is that if the building had commercial use it might not need the gas line but as we have previously found the correct analysis is whether the gas line relates to the operation or maintenance of an apartment building accordingly the items under this category are structural_components of the building and amerisouth must recover the costs over the life of the apartment buildings d site electric year total depreciation per irs depreciation per amerisouth dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number the site electric involves lines--both underground lines primary and secondary conduit and wire and overhead electric service--as well as trenching and backfill amerisouth also includes wall packs exterior lighting in this category because amerisouth puts forward the same arguments for the underground lines which include the trenching and backfill as it has for the utilities we have already discussed the underground lines meet the same fate--we find that they are structural_components of the buildings and since we have resolved the ownership of the overhead electric service issue in favor of the commissioner we concentrate our efforts on the wall packs the wall packs illuminate the exterior of the apartments for the convenience and safety of the tenants beyond this general purpose amerisouth provides no other evidence that the wall packs are specialized lighting see metro tcmemo_1987_38 or are otherwise not structural_components of the building we find for the commissioner e special hvac year total depreciation per irs depreciation per amerisouth dollar_figure big_number dollar_figure big_number big_number big_number the venting connected to the stove hoods and the venting connected to clothes dryers in the apartments make up special hvacdollar_figure amerisouth has units with washer and dryer connections for tenant use and seven common laundry rooms with amerisouth referred to the stove hoods as microwave hoods but at trial we learned that the apartments had no microwave hoods washers and dryers operated by coinmach the clothes-dryer vents are four-inch metal pipes that extend from the back of the clothes dryers to the outside of the buildings the venting that extends from the stove hoods pulls smoke humidity and hot air out of the kitchens the clothes-dryer vents serve specific equipment--the dryers see morrison tcmemo_1986_129 finding that kitchen water piping served equipment and was not general building plumbing the vents expel hot air and carbon monoxide and reduce humidity these vents extend directly from the dryers to the outside of the building and have no connection to the apartments’ general ventilation system the commissioner argues that the clothes-dryer venting serves the function of ventilating the apartments but he has failed to show how the venting services the apartments generally apart from the clothes dryers therefore we find for amerisouthdollar_figure amerisouth has few electric dryers though tenants can rent them and does not own any gas dryers--coinmach does the commissioner did not concern himself on brief with ownership of the dryers ownership of clothes washers and dryers came up only with allocating rough-in costs but we do while nonownership and lack of use may be evidence that components are used only for general building operation in this case it’s a distinction without a difference see 76_tc_609 n ownership was irrelevant in light of congressional intent we find that the vents are designed for_the_use_of continued we are however not convinced that the vent hoods above amerisouth’s stoves are tangible_personal_property although they serve equipment--amerisouth’s kitchen ovens--we are not convinced that they serve only the stoves amerisouth contends that the vents remove both heat and smells the commissioner counters that these odors and heat can come from beyond the stovetop and we agree amerisouth does little to rebut the commissioner’s argument and so we find that the hoods are structural_components of the buildings and must be depreciated over years see morrison tcmemo_1986_129 w ithout consideration of the ‘sole justification’ test the kitchen air makeup unit would constitute a structural_component f special plumbing year total depreciation per irs depreciation per amerisouth dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number continued the dryers and serve no other purpose amerisouth also claims accelerated_depreciation for what it terms special plumbing special plumbing consists of sinks garbage disposals waste-and-rough- water piping connected to dishwashers and clothes washers floor drains as well as the waste lines running from the floor drains and laundry-room gas lines sinks we first look into amerisouth’s sinks--the kitchen sinks and the plastic utility sink in the office buildingdollar_figure amerisouth concentrates most of its persuasive efforts on the permanence of the sinks amerisouth argues that the sinks are easy to remove--disconnect the sink from the water lines and remove approximately four screws or clamps--and uses the apartment renovations as an example but sec_1_48-1 income_tax regs specifically lists sinks as structural_components ‘structural components’ includes plumbing fixtures such as sinks and bathtubs and while amerisouth tags this type of plumbing with the epithet special providing water for the kitchen is hardly unusual in the sense of scott and amerisouth factors in the location of an apartment sink to determine depreciable life amerisouth’s expert states that bathroom sinks are considered by the irs as being a part of a normal function of a building and kitchen sinks typically are not considered a normal function of a building apparently from amerisouth’s perspective this comes back to experience of working with the irs you can’t be so greedy that you take everything later cases and amerisouth fails to give any other evidence that it periodically replaced or even planned to replace sinks after the renovation so we find the sinks are also structural_components of the buildings and not depreciable apart from themdollar_figure piping as for the garbage disposals amerisouth claimed depreciation for them as year property and the commissioner did not adjust their depreciation this leaves waste-and-rough-water piping in the kitchens the waste piping connects to the garbage disposals and carries away the water and waste coming from kitchen sinks the rough-water piping is fittings that connect the straight pipes coming from the wall to the sinks because we have already decided that the sinks are structural_components we also find drain pipes to be integral parts of the buildings’ plumbing and thus are also structural_components see hosp corp t c at dollar_figure amerisouth also argues that sinks are not needed in a generic building contrasting its buildings with office buildings we have already dispensed with this argument by holding that we look at the operation and maintenance of an apartment building apart from the general description in ms’s cost-segregation study amerisouth does not provide a clear picture of any other piping that extends from the dishwasher it made no argument peculiar to dishwasher piping at trial nor did continued amerisouth also claims it has waste-and-rough-water piping for clothes washers in individual apartments and the shared laundry rooms the record does not clarify whether this category deals only with components visible from the apartment side of the wall or whether pipes behind the wall or some part of them are also included the inspection and testimony of the commissioner’s expert provide useful information the term rough or rough-in refers to installing the plumbing fittings eg water and drain lines that connect a specific component such as a sink or other plumbing fixture to a building’s plumbing lines amerisouth however provides no evidence that the piping in question runs from where clothes washers are connected to the building’s plumbing lines in the wall see des moines cold storage co v commissioner tcmemo_1988_241 n since petitioner has the burden_of_proof it must suffer the consequences of an inadequate record we find for the commissioner continued it file a posttrial brief we find that it has thus conceded any additional issues in this category see eg 117_tc_183 n laundry-room drain gas-line and waste lines in amerisouth’s seven shared laundry rooms there are gas lines which run from the primary gas lines to clothes dryers there are also drains and waste lines which run from the drains to pipe water out the parties agree that the purpose of the drains is to prevent a flood from spreading throughout the building if a pipe leading to the clothes washers breaks for amerisouth this category is a wash we do not agree with the commissioner that the gas lines in question are part of the buildings’ general plumbing systems these secondary lines do not supply gas to the building generally they supply it only to the dryers see duaine tcmemo_1985_39 g as connectors from the building’s main gas line service the restaurant’s cooking elements and do not relate to general building services but amerisouth does not persuade us that the drains and waste lines connected to the drains are similar unlike the dedicated gas lines they’re a permanent part of the building and amerisouth does not argue otherwise and unlike some of the components we look at the drains do not appear to be necessary for the effective operation of equipment see morrison tcmemo_1986_129 finding that drains in the kitchen did not relate to the general drainage of waste from the cafeteria building where they drained wastes resulting from food preparation activities and serviced specific equipment the stated purpose is to protect the apartments not the washers and dryers so we find for the commissioner on these components g special electric year total depreciation per irs depreciation per amerisouth dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number amerisouth’s most detailed category is special electric it begins where site electric ends--with the main panels connected to the outside lines--and comprises some internal wiring and the assets that are connected to the internal wiring such as light switches outlets and paddle fans amerisouth claimed accelerated_depreciation for components in both its apartments and its office office apartments paddle fans sign flood light recessed lights spot lights closed circuit surveillance camera and monitor sliding-gate components outlets electric panel timers irrigation and wallpacks outlets door bells paddle fans dining chandeliers light switches wiring main and unit electric panels timers irrigation and wallpacks amerisouth’s wish list is long but its supporting evidence is limited we can extinguish its argument about recessed lights referred to as decorative and spot lights which are presumably for security amerisouth did not provide evidence of how the lights serve a decorative or security purpose see metro tcmemo_1987_ so we find they are structural_components amerisouth also fails to show how its door bells are anything but permanent components of the building finally we have already found the wallpacks to be structural_components of the building and amerisouth does not show that their timers are other than integral to operation of these structural_components that makes these assets structural_components too the commissioner concedes that the gate components are land improvements depreciable over years as are the duplex outlet and timer relating to the watering of the grounds the parties also agree that the surveillance components--consisting of a camera and tv--as well as the sign flood light and accompanying timer are tangible_personal_property that still leaves us with several items to consider paddle fans and light fixtures although the dining areas of the apartments are similar in layout some have the bonus of not only a paddle fan but an attached light fixturedollar_figure because the others do not the lighting provided by these combination light-fans arguably serves to provide ambiance and only incidentally serves as general lighting see morrison tcmemo_1986_129 finding chandeliers were purely decorative and not a major source of light but amerisouth failed to provide evidence on that point at trialdollar_figure nor does it argue that the fans were primarily decorative although these components can be moved during a remodeling amerisouth does not provide evidence of actual or ms’s cost-segregation study refers to the light fixtures attached to paddle fans as dining chandeliers and the direct testimony of amerisouth’s cost-segregation-study expert that t he light fixture itself is used for general illumination in that space even serves to undermine it planned systematic replacementdollar_figure see shoney’s s inc v commissioner tcmemo_1984_413 finding along with other factors that the average five-to-seven- year replacement of chandeliers was evidence they were not structural_components simply arguing these assets are not part of the building without pointing out why is not enough we find for the commissioner outlets although amerisouth refers to the outlets in this category as specialized there doesn’t seem to be anything special about them amerisouth argues that these outlets are necessary to operate personal_property but that does nothing to distinguish the special outlets from any other outlet in the apartments or office the fact alone that a copier treadmill toaster or other item of personal_property happens to be plugged into a specific outlet in no way indicates that the outlet is for that specific use rather than the general operation or maintenance of the building see hosp corp t c pincite we thus agree with the commissioner that the countertop outlets and the outlets that a treadmill copier and cycle might plug into are structural_components at trial amerisouth elicited testimony that landlords typically replace chandeliers whenever they remodel a building the testimony did not give specifics for amerisouth’s buildings or for that matter any other buildings on the other hand we find that duplex outlets that are four-feet above the ground in kitchen areas clearly accommodate refrigerators which are personal_property the layout of the kitchens and the location of these outlets leave little doubt they are specifically for refrigerators see hosp corp t c pincite outlet receptacles used for televisions in hospital rooms are personal_property the same is true with respect to the 220-volt outlets in kitchen areas that are used solely for powering stoves and the outlets in laundry areas for washers and dryers similarly the cable telephone and data outlets are used for items that are not structural_components so they are considered part of those items see id pincite phone jacks are used with telephone equipment and thus are considered personal_property the commissioner doesn’t refute our holding in hospital corp nor does he attempt to distinguish it he instead argues that electric wiring is listed in the regulation he’s right and we also agree that amerisouth doesn’t provide evidence that these components are not permanent but the regulation emphasizes the relationship of a component to the operation or maintenance of a building and in unusual circumstances--when that item relates to a specific piece of equipment--it is not a structural_component see eg hosp corp t c pincite scott t c pincite on these components we find for amerisouthdollar_figure wiring the parties stipulate that the wiring in question runs from a unit panel in each apartment to outlets near kitchen garbage disposals dishwashers and the hoodver the stovedollar_figure amerisouth has the burden to produce evidence that this wiring supplied power for the specific personal_property claimed and the evidence we do have is unclear amerisouth’s expert described the wiring as a hard or direct connection to the personal_property but other evidence showed that the wiring in question runs through the wall cavities to outlets these pieces of property plug into and if the latter situation’s the case the commissioner’s expert stated it’s possible that the wiring connects to other outlets since amerisouth never showed that the wiring supplied power for these specific components and not the apartments generally we find for the the commissioner does not present evidence of how these components clearly in use for specific property could be adapted for general uses we therefore do not need to decide to what extent the reasoning of a c monk co v united st686_f2d_1058 4th cir might apply amerisouth’s expert described a microwave hood but again that’s blowing smoke--there are no microwave hoods in the apartments only stove hoods commissioner see des moines cold storage tcmemo_1988_241 the taxpayer did not submit evidence other than self-serving testimony that wiring supplied power for particular system rather than contributing to the overall operation or maintenance of the property electric panels amerisouth claims that it should have a shorter recovery_period for a part of the main and unit electric panels in the buildings because some percentage of electricity flowing through those panels is used for personal_property in scott we allowed an allocation see scott t c pincite but later caselaw has been much stingier see a c monk co v united st686_f2d_1058 4th cir saying better approach is to determine whether an electrical system has more general uses than simply operating specific pieces of machinery we do not need to decide whether allocation is appropriate in this case because we find that amerisouth has failed to reliably substantiate its allocation of the costs of the electric load between specific equipment and the overall requirements of the building see des moines cold storage tcmemo_1988_241 the problem here is that the electric panels have faulty or missing labels and amerisouth instead of testing the units just extrapolates from bad data on some of the units to come up with an allocation for all the panels in all the buildings we therefore find that it must depreciate the panels over the life of the apartments h finish carpentry year total depreciation per irs depreciation per amerisouth dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number finish carpentry comprises the shelving in pantry closets and in the living- room-wall recesses the shelving in the office building wood-base crown molding chair rails wood paneling and closet rods amerisouth does not argue that these items are accessory to its business but does argue that the shelves and closet rods are readily removable without doing any damage to the walls it also argues that the molding and paneling enhance the apartments’ decor and are therefore not mere structural_components the commissioner does not dispute that these items are movable but tells us to focus on other signs of their permanence the design of the buildings particularly the wall recesses in the living rooms accommodates permanent shelving the shelves allow for storage a necessity in an apartment building and the paneling molding and chair rails protect other parts of the buildings such as the floors walls and ceilings from damage we agree with the commissioner though the shelves and closet rods are moveable movability is not the only sign an asset lacks permanence see eg consol freightways f 2d pincite amerisouth fails to show that it actually moved or planned to remove and reuse the shelves or closet rods see hosp corp t c pincite and doesn’t point to any other indication of nonpermanence we therefore find that these items are also structural_components of the buildings we also conclude that the paneling molding and chair rails are structural_components of the buildings paneling is specifically mentioned in the regulations see sec_1_48-1 income_tax regs the term ‘structural components’ includes permanent coverings such as paneling and although these items are also decorative they are not items that fall squarely within the language of s rept no explaining what constitutes tangible_personal_property see metro tcmemo_1987_38 security lights grow lights and decorative lighting are special lighting which falls within language of report morrison tcmemo_1986_129 lattice millwork fell within removable partition language of report i millwork year total depreciation per irs depreciation per amerisouth dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number amerisouth’s millwork consists of cabinets and countertops their proper classification is strictly an issue of their permanence--amerisouth argues that they are all removable but as with finish carpentry amerisouth did not present any evidence about the additional factors regarding their permanence that we need to consider we therefore make the same finding as we do on finish carpentry the millwork is a structural_component j interior windows and mirrors year total depreciation per irs depreciation per amerisouth dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number this penultimate category includes the office’s interior windows as well as the mirrors found on the walls of all the apartments’ dining rooms and the mirrors found in all the apartments’ bathrooms in his report amerisouth’s cost-segregation expert states that an interior window is not an asset we would normally treat a sec_1245 property unless the wall itself was demountable or the window served another unique function but amerisouth presents no evidence of removable walls or the uniqueness of the windows we find the windows to be structural_components amerisouth’s former attorneys also reflected little on the mirrors during trial they tried to get testimony of the mirrors’ decorative function from an adverse witness but amerisouth’s own witness stated the dining-room mirrors had no function the mirrors are removable but we see no other evidence that these mirrors are not permanent see hosp corp t c pincite we believe amerisouth intends the mirrors to stay where they are and so we find that the mirrors are part of the building k special painting year total depreciation per irs depreciation per amerisouth dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number amerisouth considers the paint on shelves wood base chair rails closet rods and crown molding as special special because amerisouth considers the assets that the paint covers to be sec_1245 property amerisouth’s former attorneys asked at trial whether the classification of the paint should follow that of the items painted and the commissioner’s witness responded yes we see no reason to coat that succinct view with any additional analysis--those items are structural_components and therefore so is the paint conclusion we have reached the end of the trail most of the commissioner’s arguments have survived but a few were lost along the way and therefore decision will be entered under rule


internal_revenue_service number release date index number ------------------------------------------------ ------------------------------------------------------------ --------------------- ----------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no ------------- telephone number --------------------- refer reply to cc fip b02 plr-127239-09 date date legend fund ----------------------------------------------------------------------- --------------------------------------------------------------------------------------- -------------------------------------------------------------------- trust subsidiary type a company state country ---------------------------------------------- -------------------------------------- ------------------------------------ ------------ ---------------------- dear ------------- this responds to your letter dated date submitted by your authorized representative on behalf of fund fund requests that the internal_revenue_service rule that income derived from its investments in a wholly-owned subsidiary that is a controlled_foreign_corporation cfc constitutes qualifying_income under sec_851 of the internal_revenue_code_of_1986 as amended the code facts fund is a series of trust which is a statutory trust under the laws of state trust is registered as an open-end series management investment_company under the investment_company act of u s c 80a-1 et seq as amended the act fund is an accrual_method taxpayer classified as a corporation for federal_income_tax plr-127239-09 purposes fund uses a calendar_year as its taxable_year fund is a regulated_investment_company ric under sec_851 of the code fund has formed subsidiary a wholly-owned subsidiary incorporated as a type a company under the laws of country under the laws of country a type a company provides limited_liability for all holders of shares a shareholder’s liability is limited to the amount if any unpaid with respect to the shares acquired by the shareholder subsidiary has filed an election on form_8832 entity classification election fund to ensure that subsidiary will be treated as a corporation for federal_income_tax purposes fund represents that although subsidiary will not be registered as an investment_company under the act subsidiary will comply with the requirements of section f of the act investment_company act release no and related sec guidance pertaining to asset coverage with respect to transactions in commodity futures and other transactions in derivatives fund will invest a portion of its assets in subsidiary subject_to the limitations set forth in sec_851 of the code subsidiary is expected to invest in commodities and commodities-related instruments but may also invest in other_securities debt or cash subsidiary will be wholly-owned by fund and is thus expected to be classified as a cfc as defined in sec_957 of the code fund will include its subpart_f_income attributable to subsidiary under the rules in the code applicable to cfcs law and analysis sec_851 of the code provides that a corporation shall not be considered a ric for any taxable_year unless it meets an income test under this test at least percent of its gross_income must be derived from certain enumerated sources sec_851 defines qualifying_income in relevant part as - dividends interest payments_with_respect_to_securities_loans as defined in sec_512 and gains from the sale_or_other_disposition of stock_or_securities as defined in sec_2 of the act or foreign_currencies or other income including but not limited to gains from options futures or forward contracts derived with respect to the ric’s business of investing in such stock securities or currencies sec_2 of the act defines the term security as - any note stock treasury_stock security future bond debenture evidence_of_indebtedness certificate of interest or participation in any profit-sharing agreement collateral-trust certificate preorganization certificate or subscription transferable share investment contract voting-trust plr-127239-09 certificate certificate of deposit for a security fractional undivided_interest in oil gas or other mineral rights any put call straddle option or privilege on any security including a certificate of deposit or on any group or index of securities including any interest therein or based on the value thereof or any put call straddle option or privilege entered into on a national securities exchange relating to foreign_currency or in general any interest or instrument commonly known as a security or any certificate of interest or participation in temporary or interim certificate for receipt for guarantee of or warrant or right to subscribe to or purchase any of the foregoing in addition sec_851 of the code provides that for purposes of sec_851 there shall be treated as dividends amounts included in gross_income under sec_951 or sec_1293 for the taxable_year to the extent that under sec_959 or sec_1293 as the case may be there are distributions out of the earnings_and_profits of the taxable_year which are attributable to the amounts so included sec_957 of the code defines a controlled_foreign_corporation cfc as any foreign_corporation in which more than percent of the total combined voting power of all classes of stock entitled to vote or the total value of the stock is owned by united_states_shareholders on any day during the corporation’s taxable_year a united_states_shareholder is defined in sec_951 as a united_states_person who owns percent or more of the total voting power of a foreign_corporation fund represents that it will own percent of the voting power of the stock of subsidiary fund is a united_states_person fund therefore represents that subsidiary will qualify as a cfc under these provisions sec_951 of the code provides that if a foreign_corporation is a cfc for an uninterrupted period of days or more during any taxable_year every person who is a united_states_shareholder of this corporation and who owns stock in this corporation on the last day of the taxable_year in which the corporation is a cfc shall include in gross_income the sum of the shareholder’s pro_rata share of the cfc’s subpart_f_income for the taxable_year sec_952 of the code defines subpart_f_income to include foreign_base_company_income determined under sec_954 under sec_954 foreign_base_company_income includes foreign_personal_holding_company_income determined under sec_954 sec_954 defines foreign_personal_holding_company_income to include dividends interest royalties rents and annuities subsidiary’s income from its investments in commodities and commodity-linked instruments may generate subpart_f_income fund therefore represents that it will include in income subsidiary’s subpart_f_income for the taxable_year in accordance with sec_951 plr-127239-09 conclusion based on the facts as represented we rule that subpart_f_income of the subsidiary attributable to fund is income derived with respect to fund’s business of investing in the stock of subsidiary and thus constitutes qualifying_income under sec_851 of the code this ruling is directed only to the taxpayer who requested it and is limited to the facts as represented by the taxpayer sec_6110 provides that this letter may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely thomas m preston_______ thomas m preston senior counsel branch office of associate chief_counsel financial institutions products