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

Heading: whether the refrigerated portion is tangible personal property

Text: 36 Having concluded that the refrigerated portion of the Addition is not a building, we now consider the issue of whether the refrigerated area is, as Munford contends, tangible personal property under section 48(a)(1)(A) of the Code, and hence eligible for an investment tax credit to an extent greater than the Commissioner allowed. As previously indicated, the Commissioner disallowed the claimed investment tax credit except with respect to certain cooling elements of the refrigerated area, such as its pipe insulation, valves, and motors. Thus, the remaining costs for which [Munford] 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.... Munford, 87 T.C. at 488. 37 Section 48(a)(1) of the Code delineates two categories of section 38 property: tangible personal property within the meaning of section 48(a)(1)(A) and other tangible property within the meaning of section 48(a)(1)(B). Because the Tax Court found, and Munford has conceded, that the refrigerated portion of the Addition is not other tangible property because the refrigerated area is not used as an integral part of, or in connection with, a qualifying activity under section 48(a)(1)(B), we only concern ourselves with the definition of the term tangible personal property as that term is used in section 48(a)(1)(A) of the Code. 38 Unlike section 48(a)(1)(B), section 48(a)(1)(A) excludes from its scope not only buildings, but also other inherently permanent structures and their structural components. See Treas.Reg. Sec. 1.48-1(c). The Addition, affixed to the land by means of a concrete foundation placed at a depth of approximately two to three feet, is an inherently permanent structure. Indeed, the evidence at trial established that the structural elements of the Addition could not be removed without destroying the physical integrity of the structure itself. Thus, we agree with the Tax Court that the Addition is an inherently permanent structure. Munford, 87 T.C. at 489. 5 39 Munford, relying upon the penultimate sentence of Treas.Reg. 1.48-1(c), contends that property which is in the nature of machinery may qualify as tangible personal property, notwithstanding the fact that it is an inherently permanent structure. See Treas.Reg. 1.48-1(c) ([A]ll 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, Munford contends that because the structural components of the refrigerated area of the Addition operate together with the refrigeration system components to cause the refrigerated area to function in much the same manner as a giant refrigerator or freezer, the entire refrigerated area should be considered property ... in the nature of machinery. The Commissioner, while acknowledging that property in the nature of machinery may qualify as tangible property even if it is inherently permanent, disagrees with the applicability of Treas.Reg. 1.48-1(c) because the Commissioner rejects Munford's characterization of the refrigerated area of the Addition as property in the nature of machinery. 6 40 Munford's reliance upon Treas.Reg. 1.48-1(c) is heavily predicated upon Weirick v. Commissioner, 62 T.C. 446 (1974), wherein the Tax Court construed that portion of Treas.Reg. 1.48-1(c) which relates to property which is in the nature of machinery. At issue in Weirick was whether the amounts expended for the construction and installation of ski lift cable support and holddown towers (line towers) and passenger ramps qualified as section 38 property eligible for the investment tax credit. The line towers, located at various points between the upper and lower terminals of the ski lift, were designed to support or hold down the lift cable. Attached to the line towers were sheave assemblies, which consisted of rubber-tired pullies upon which the ski lift would travel. The Commissioner conceded that the sheave assemblies functioned as property in the nature of machinery and were thus eligible for the investment tax credit. Loading and unloading passenger ramps were also located at both the upper and lower terminals. As stated in the Tax Court's findings, these ramps were either of the wooden type, in which case they merely rested on pads and could be moved without great difficulty, or the earthen type, in which case they had been constructed out of mounds of dirt, which had either been hauled or bulldozed to the lift site from surrounding areas. Weirick, 62 T.C. at 455. 41 In determining whether the Commissioner properly disallowed the claimed investment tax credit for the line towers, the court initially observed that the [t]he only purpose of the [line] towers [was] to serve as a support for the sheave assemblies, elevating them or lowering them to the desired height. Weirick, 62 T.C. at 454 (emphasis added). Moreover, as the Tax Court noted, because [t]he towers and the sheave assemblies were physically connected, ... when replacement was necessary, it was often as economical to replace the tower and its related sheave assembly as to simply replace the sheave assembly on an existing tower. Munford, 87 T.C. at 491. Thus, realizing that the line towers and sheave assemblies were a unitary mechanism from a functional standpoint, the Weirick court concluded that the line towers were tangible personal property within the meaning of section 48(a)(1)(A). The Tax Court reached this conclusion because the line towers, like the sheave assemblies, functioned as property in the nature of machinery. Weirick, 62 T.C. at 454. 42 Finally, with regard to the passenger ramps, the court found that even if the entire ski lift were removed, the earthen ramps would normally remain at the site because of the expenses involved in removing the dirt. Accordingly, the court agreed with the Commissioner that the earthen ramps were inherently permanent structures which did not qualify for the tax credit. Weirick, 62 T.C. at 455. As to the wooden ramps, however, the court concluded that those structures were not inherently permanent in light of the fact that they could be easily transported because [t]hey [were] not imbedded in or firmly attached to the concrete pads on which they [stood]. Weirick, 62 T.C. at 455. Consequently, the court determined that the wooden ramps qualified as tangible personal property. 43 Before applying the rationale of Weirick to the facts of this case, it is important that we place the scope of our inquiry in proper perspective. As the Tax Court observed, the issue before the Weirick court was not whether the entire ski lift constituted property in the nature of machinery and, therefore, qualified as tangible personal property. Rather, the issue presented in Weirick, whether the line towers and passenger ramps qualified as section 38 property, called for an individualized determination of whether each of those component parts was eligible for the investment tax credit. Having framed the issue, our inquiry in this case is not to consider whether the refrigerated area of the Addition, as a whole, constitutes property in the nature of machinery. Rather, the question presented is whether the structural elements of the refrigerated area qualify as property in the nature of machinery and are eligible for the investment tax credit. 44 Having considered the record, we are not persuaded that the structural elements of the refrigerated area of the Addition constitute property in the nature of machinery. First, as the Tax Court found, the structural elements of the refrigerated area perform an entirely different function from the function performed by the refrigeration system components of the Addition. For instance, although the structural elements of the Addition work in conjunction with the refrigeration system components, the structural components and refrigeration system of the Addition do not serve an inseparable purpose, similar to the manner in which the sheave assemblies and line towers functioned in Weirick. As the Tax Court found: 45 Here, the refrigeration system can operate independently of the structural elements, and the structural elements themselves serve a function independent of the refrigeration system--that of keeping out humidity and reducing temperature migration, and providing an enclosed, protected space in which frozen foods may be stored. Thus, we do not think that the structural elements can be said to be so closely related to the refrigerated system as to be considered therewith a single asset which is in the nature of machinery under the rationale of Weirick.... 46 Munford, 87 T.C. at 493. Moreover, unlike the line towers and sheave assemblies in Weirick which were so integrally related that it was just as economical to replace both as it was to replace only the sheave assemblies, no similar showing has been made that it would be just as economical to replace both the refrigeration system components and structural components as it would be to replace only the refrigeration system components themselves. Indeed, the Tax Court agreed with the Commissioner's view that the refrigeration system could be replaced without replacing the structural elements. Munford, 87 T.C. at 493. 47 We are aware of the conflicting evidence in the record concerning the interdependent relationship between the cooling elements of the Addition, for which a credit was allowed and, its structural elements, for which a credit was disallowed. Nevertheless, it is well-settled that where there are two permissible views of the evidence, the tax court's choice between them cannot be clearly erroneous. Piggly Wiggly Southern, Inc. v. Commissioner of Internal Revenue, 803 F.2d 1572, 1576 (11th Cir.1986) (discussing the clearly erroneous standard of review of factual determinations made by the Tax Court). Accordingly, we hold that the Tax Court properly sustained the Commissioner's determination that the structural elements of the refrigerated area of the Addition do not qualify as tangible personal property under section 48(a)(1)(A) of the Code and Treas.Reg. Sec. 1.48-1(c). 7