Opinion ID: 681060
Heading Depth: 3
Heading Rank: 3

Heading: HVAC System Credits

Text: 30 1. Background. Prior to 1986, the Internal Revenue Code allowed a tax credit for a taxpayer's investment in certain types of property (Section 38 Property). See I.R.C. Sec. 46 (1983). 22 In general, such property did not include structural components of buildings, such as central air conditioning or heating systems. See Treas.Reg. Sec. 1.48-1(e)(2). A limited exception for such systems existed, however, if the sole justification for them was meeting the temperature and humidity requirements essential for the operation of other machinery. See id. 23 The owners of systems that qualified under the exception were able to claim investment tax credits for such property. 31 In 1985, Albertson's claimed investment tax credits for various heating, ventilating, and air conditioning (HVAC) systems that it had installed in 33 of its supermarkets. Albertson's argued that it was entitled to the investment tax credits because the sole justification for such property was meeting the temperature and humidity requirements for Albertson's refrigerated cases and computerized checkout equipment. The Tax Court agreed and ruled in Albertson's favor. We reverse. 32 2. Analysis. The Commissioner argues that the Tax Court clearly erred in holding that the sole justification for Albertson's installation of its HVAC systems was the meeting of the temperature and humidity requirements for its other machinery. We agree. The Tax Court erred by failing to recognize that the HVAC systems were intended for and are used by Albertson's for two additional significant purposes: ventilation and customer comfort. 33 First, Albertson's HVAC systems play an important role in ventilating its supermarkets. The Tax Court completely failed to recognize this point. Albertson's HVAC systems provide a continuous supply of fresh air to its supermarkets. The systems also remove airborne bacteria, smoke, dirt, and stale odors. Because customer concerns about cleanliness are a top priority for supermarkets, Albertson's HVAC systems are crucial for attracting and retaining customers in a highly competitive market. Even Albertson's acknowledges that it is certainly only good business practice to ventilate its supermarkets. In light of these facts, we conclude that Albertson's HVAC systems play an important role in ventilating its supermarkets. 34 Second, HVAC systems clearly provide a comfortable shopping environment for Albertson's customers. The systems are set to 72?F all year round, which is well within the optimum comfort range for individuals of 68?F to 78?F. Given the broad geographical range of stores throughout Albertson's chain of supermarkets (Florida to Idaho), we find it impossible to say that air conditioning during the summer and heating during the winter does not result in a more comfortable shopping environment for the taxpayer's customers. This conclusion is supported by the fact that, during the 1950s, Albertson's had already installed HVAC systems in most of its supermarkets, well before it was aware of any interrelationship between HVAC systems and the proper functioning of its other equipment. 35 Given these facts, we conclude that it was clear error for the Tax Court to find that meeting the temperature and humidity requirements for other machinery was the sole justification for Albertson's installation of its HVAC systems. 36 Albertson's argues that customer comfort is a permissible exception to the sole justification test. That is, the HVAC systems are not disqualified even though they result in customer comfort. Specifically, Albertson's argues that the regulatory exception for employee comfort, see Treas.Reg. Sec. 1.48-1(e)(2), is equally applicable to customer comfort. We decline to adopt Albertson's expansive reading of the regulation. First, the plain language of the regulations indicates that the comfort exception applies only to employees; the regulations make no reference to any other groups of individuals. Second, the example immediately following the regulation shows that the IRS intended the employee comfort exception to be a narrow one. See id. (giving the example of a factory--where there are no customers--instead of a retail store). Accordingly, we decline to import the concept of customer into the word employee. 24 37 In sum, because Albertson's HVAC systems clearly provide for ventilation and customer comfort, we reject its argument that the sole justification for such systems is maintaining the temperature and humidity requirements for its other machinery. Although such maintenance might very well be a primary reason for installing the HVAC systems, it is not the only significant one. Accordingly, the HVAC systems do not fall within the sole justification exception for central air conditioning or heating systems, see Treas.Reg. Sec. 1.48-1(e)(2), and Albertson's is not eligible to claim tax credits for such property. 25