Opinion ID: 507885
Heading Depth: 1
Heading Rank: 4

Heading: Is it tangible personal property?

Text: 76 The crucial issue becomes whether the Addition is tangible personal property. If so, the property qualifies for the investment tax credit. The definition is found in section 1.48-1(c), Income Tax Regs.: 77 (c) Definition of tangible personal property.--If property is tangible personal property it may qualify as section 38 property irrespective of whether it is used as an integral part of an activity (or constitutes a research or storage facility used in connection with such activity) specified in paragraph (a) of this section. Local law shall not be controlling for purposes of determining whether property is or is not tangible or personal. Thus, the fact that under local law property is held to be personal property or tangible property shall not be controlling. Conversely, property may be personal property for purposes of the investment credit even though under local law the property is considered to be a fixture and therefore real property. For purposes of this section, the term tangible personal property means any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items which are structural components of such buildings or structures). Thus, buildings, swimming pools, paved parking areas, wharves and docks, bridges, and fences are not tangible personal property. Tangible personal property includes all property (other than structural components) which is contained in or attached to a building. Thus, such property as production machinery, printing presses, transportation and office equipment, refrigerators, grocery counters, testing equipment, display racks and shelves, and neon and other signs, which is contained in or attached to a building constitutes tangible personal property for purposes of the credit allowed by section 38. Further, all property which is in the nature of machinery (other than structural components of a building or other inherently permanent structure) shall be considered tangible personal property even though located outside a building. Thus, for example, a gasoline pump, hydraulic car lift, or automatic vending machine, although annexed to the ground, shall be considered tangible personal property. 78 In applying this definition it is necessary to reconsider the nature and use of the property involved. The tax court assists us in recounting the determination made by the Commissioner. The respondent in this case 79 has allowed the credit for certain refrigeration system components of the Addition, including refrigeration pipes and pipe insulation, valves, and motors, having a cost of $103,470.12. Thus, the remaining costs for which petitioner is seeking the investment tax credit relate, in essence, to the structural elements of the refrigerated area of the Addition, including its foundation footings, walls, floor, roofing and supports, vapor barrier, insulation, and electrical components allocable thereto, having a cost of $404,585. 80 87 T.C. at 488 (footnote omitted). 81 The use of the property is conceded to be for refrigeration only. In note 21 of his opinion in discounting the Commissioner's argument that the Addition was a warehouse, the court said: the Addition is not, in our view, used for 'general storage purposes,' but rather, is both designed and used for the much more specific purpose of storing frozen foods at low temperatures. 82 In finding that the Addition was not personal property, the tax court returned to the definition of a building which states  'tangible personal property' means any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items which are structural components of such buildings or structures). The tax court then proceeded to reject the rationale used in finding the Addition not to be a building and finds it not to be tangible personal property. There is no question that refrigerators are specifically listed as tangible personal property in the definition of that term. The tax court found that the Addition had no use but that of a refrigerator, but then on page 492 says: our inquiry must focus, not upon the refrigerated area of the Addition as a whole, but rather, upon the structural elements thereof for which petitioner is seeking an investment tax credit. 83 The tax court's focus went awry when it decided that the walls, roof, foundations, etc. were structural components and ignoring Sec. 1.48-1(e), Definition of building and structural components. 1 While true in most cases, those components were not principally structural in this case. The under-floor ventilation pipes to prevent the earth from freezing, the vapor barrier, the insulation to prevent temperature migration, the contraction joints to prevent the floor from buckling, the tilt-up panels, et al. were not structural components within the meaning of Sec. 1.48-1(e). See emphasized portions of regulation in footnote. There is no logic in allowing the tax credit for an oil and gas storage tank used in the distribution of those products and disallowing the credit for a giant refrigerator used in the distribution of foodstuffs. 84 In enacting the investment tax credit Congress wished to stimulate commerce by encouraging investment in properties that would assist in expanding the economy. It is elementary that the production of foodstuffs largely goes to naught without a system of distributing those foodstuffs to consumers. The taxpayer's giant refrigerator is a link in that distribution chain and it is nonsense to penalize him for choosing to construct one large refrigerator rather than build a warehouse and then construct a series of large refrigerators inside the warehouse. Taxpayer started in the ice business in 1909 and owned and operated 12 refrigerated facilities in the southeastern United States when the Addition was constructed. One can assume from such experience that taxpayer concluded that the giant refrigerator was the best competitive investment rather than choosing the large individual refrigerators within a warehouse. Presumably his decision would lead to more competitive pricing of foodstuffs which is what the system is all about. 85 Thus, I respectfully dissent from the majority opinion which affirms the tax court.