Court Opinion

ID: 4331305
Source: CourtListenerOpinion
Date Created: 2018-11-14 00:03:56.267474+00
Date Added: 2024-06-11T14:47:32.047119
License: Public Domain

109 T.C. No. 2

                    UNITED STATES TAX COURT

HOSPITAL CORPORATION OF AMERICA AND SUBSIDIARIES, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

    Docket Nos. 10663-91, 13074-91,      Filed July 24, 1997.
                28588-91, 6351-92.

         Ps own, operate, and manage hospitals and related
    businesses. For taxable years ended 1985 through 1987
    Ps claimed depreciation deductions based on 5-year
    recovery periods for certain properties they placed in
    service during those years, which properties Ps claim
    constitute tangible personal property. R determined
    that the properties constitute structural components of
    the buildings to which they relate and that the
    properties therefore must be depreciated over the same
    recovery periods as those buildings.
         Held: For purposes of assigning appropriate
    recovery classes or recovery periods to the properties
    to determine allowable depreciation deductions pursuant
    to sec. 168, I.R.C., tests developed under prior law
    for purposes of the investment tax credit are
    applicable to decide whether the property constitutes
    tangible personal property.
                              - 2 -

          Held further: The prohibition contained in sec.
     168, I.R.C., against the use of the component method of
     depreciation does not preclude the use of an analysis
     based on Scott Paper Co. v. Commissioner, 74 T.C. 137
     (1980), and its progeny, and sec. 1.48-1(1), Income Tax
     Regs., and accordingly such authorities are applied to
     assign appropriate recovery classes or recovery periods
     to the properties in issue.

     N. Jerold Cohen, Randolph W. Thrower, J.D. Fleming, Jr.,

Walter H. Wingfield, Stephen F. Gertzman, Reginald J. Clark,

Amanda B. Scott, Walter T. Henderson, Jr., William H. Bradley,

and John W. Bonds, Jr., for petitioners in docket No. 10663-91.

     N. Jerold Cohen, Randolph W. Thrower, J.D. Fleming, Jr.,

Walter H. Wingfield, Stephen F. Gertzman, Reginald J. Clark,

Amanda B. Scott, Walter T. Henderson, Jr., William H. Bradley,

John W. Bonds, Jr., and Daniel R. McKeithen, for petitioners in

docket No. 13074-91.

     N. Jerold Cohen, Walter H. Wingfield, Stephen F. Gertzman,

Amanda B. Scott, Reginald J. Clark, Randolph W. Thrower, Walter

T. Henderson, Jr., and John W. Bonds, Jr., for petitioners in

docket No. 28588-91.

     N. Jerold Cohen, Reginald J. Clark, Randolph W. Thrower,

Walter T. Henderson, Jr., and John W. Bonds, Jr., for petitioners

in docket No. 6351-92.

     Robert J. Shilliday, Jr., Vallie C. Brooks, and William B.

McCarthy, for respondent.
                               - 3 -

     WELLS, Judge:   These cases were consolidated for purposes of

trial, briefing, and opinion and will hereinafter be referred to

as the instant case.1   Respondent determined deficiencies in

petitioners' consolidated corporate Federal income tax as

follows:

             TYE                         Deficiency

             1978                       $2,187,079.00
             1980                          388,006.58
             1981                       94,605,958.92
             1982                       29,691,505.11
             1983                       43,738,703.50
             1984                       53,831,713.90
             1985                       85,613,533.00
             1986                       69,331,412.00
             1987                      294,571,908.00
             1988                       25,317,840.00

Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the years in issue, and all

1
    The instant case involves many issues, some of which have
been settled or decided. The issues remaining for decision
involve matters falling into two reasonably distinct categories,
which the parties have denominated the MACRS depreciation issue
and the captive insurance or Parthenon Insurance Co. issues. The
MACRS depreciation issue was presented at a special trial session
with two other distinct categories of issues that we previously
decided, and the captive insurance issues were severed for trial
purposes and were presented at a subsequent special trial
session. Separate briefs of the parties were filed for each of
the distinct categories of issues. We decided tax accounting
issues in Hospital Corp. of Am. v. Commissioner, T.C. Memo. 1996-
105; Hospital Corp. of Am. v. Commissioner, 107 T.C. 73 (1996);
and Hospital Corp. of Am. v. Commissioner, 107 T.C. 116 (1996).
We decided an issue related to the sale of the stock of certain
subsidiaries to HealthTrust, Inc.--The Hospital Company in
Hospital Corp. of Am. v. Commissioner, T.C. Memo. 1996-559. The
Parthenon Insurance Co. issues will be addressed in a separate
opinion subsequently to be released. The instant opinion
involves the MACRS depreciation issue.
                               - 4 -

Rule references are to the Tax Court Rules of Practice and

Procedure.

     The issues to be decided concern the appropriate recovery

classes (for tax years ended 1985 and 1986) or appropriate

recovery periods (for tax years ended 1987 and 1988) for certain

tangible property that petitioners placed in service during those

years.   To decide whether petitioners utilized the proper

recovery classes or periods in calculating their claimed

depreciation deductions for those taxable years, we must decide

(1) whether the tests developed under prior law for purposes of

the investment tax credit are applicable, and, if so (2) whether

the respective properties constitute section 1245 personal

property or section 1250 real property pursuant to those tests.

                         FINDINGS OF FACT

     Some of the facts have been stipulated for trial pursuant to

Rule 91.   The parties' stipulations of fact are incorporated

herein by reference and are found as facts in the instant case.

     Petitioners were members of an affiliated group of

corporations whose common parent was Hospital Corporation of

America (HCA), which was incorporated under the laws of the State

of Tennessee.2   HCA maintained its principal offices in

2
    On Feb. 10, 1994, HCA was merged with and into Galen
Healthcare, Inc., a subsidiary of Columbia Healthcare Corp. of
Louisville, Kentucky, and the subsidiary changed its name to HCA-
Hospital Corp. of America. On that same date, the parent changed
                                                   (continued...)
                                 - 5 -

Nashville, Tennessee, on the date the petitions were filed.    For

each of the taxable years involved in the instant case, HCA and

its domestic subsidiaries filed a consolidated Federal corporate

income tax return (consolidated return) on Form 1120 with the

Director of the Internal Revenue Service Center at Memphis,

Tennessee.

     Petitioners' primary business is the ownership, operation,

and management of hospitals.    In Hospital Corp. of Am. v.

Commissioner, T.C. Memo. 1996-105, we set forth a detailed

description of petitioners' hospital operations, which will not

be reiterated here.   We incorporate herein our findings of fact

contained in that Memorandum Opinion.

     During the taxable years in issue, petitioners constructed a

number of hospital facilities.    Those hospital facilities consist

generally of 10 different categories, which the parties

denominate as follows:   (1) Large Medical/Surgical Facilities;

(2) Small Medical/Surgical Facilities; (3) Ancillary Facilities;

(4) Radiology Facilities; (5) Small Psychiatric Facilities; (6)

Large Psychiatric Facilities; (7) Obstetrics Facilities; (8)

Ambulatory Surgery Facilities; (9) Patient Bed Facilities; and

(10) Ancillary II Facilities.

     On their tax returns for taxable years ended 1985, 1986, and

1987, petitioners classified as tangible personal property

2
   (...continued)
its name to Columbia/HCA Healthcare Corporation.
                               - 6 -

certain items relating to hospital facilities constructed during

those taxable years, and claimed the investment tax credit

(ITC),3 and depreciation deductions using a 5-year recovery

period.   Respondent, however, determined in the notice of

deficiency that a number of those items were structural

components of the related buildings and not personal property,

that those items were not eligible for ITC, and that they must be

depreciated over the same recovery period as the buildings to

which they related.   Prior to trial, the parties resolved the ITC

issue, leaving for trial the issue of the proper classification

of the property items for purposes of claiming the depreciation

deduction for the taxable years in issue.

     On their tax returns for taxable years ended 1987 and 1988,

petitioners classified as tangible personal property certain

items relating to hospital facilities constructed during those

years and claimed depreciation deductions using a 5-year recovery

period.   Respondent, however, determined in the notice of

deficiency that a number of those items were structural

components of the related buildings and that they must be

depreciated over the same recovery period as the buildings to

which they related.

3
    The investment tax credit (ITC) was repealed by the Tax
Reform Act of 1986, Pub. L. 99-514, sec. 211(a), 100 Stat. 2166,
effective (subject to transition rules) for property placed in
service after Dec. 31, 1985.
                               - 7 -

     All of the property items in issue (disputed property items)

were installed in hospitals constructed for petitioners pursuant

to contracts with general construction contractors during taxable

years ended 1985, 1986, 1987, and 1988.   The parties have agreed

as to the proper categorization and the total construction cost

of each facility, the cost bases of the particular disputed

property items,4 and the dates on which each of the facilities

(and the property items located therein) were placed in service.

The parties have agreed to procedures to be followed to implement

our decision once we decide the appropriate recovery classes (or

recovery periods) for the disputed property items.

     The parties have designated one facility to serve as a

"representative facility" for each of the 10 different categories

of hospital facilities.   The parties agree, however, that the

property items in petitioners' hospital facilities are identical

to each other in all material respects (i.e., manner of

4
    For convenience, the parties have assigned various property
unit numbers to the disputed property items. The parties defined
and identified property units to include all functionally or
structurally related items. Property units are categorized as
either item property units or group or system property units.
From time to time we refer to the disputed property items by
their assigned property unit numbers.
                              - 8 -

attachment, function, construction, and design) regardless of the

facility in which they are contained.

Description of the Disputed Property Items5

5
    On brief, petitioners group the disputed property items into
categories denominated as follows: Primary and secondary
electrical distribution systems (Property Unit 1900); branch
electrical wiring and connections and special electrical
equipment (Property Units 2200, 2244, 2320, 3026, 3075, 3195,
3280, 3292, 3298, 4040); branch electrical wiring, connections
and receptacles relating to television equipment (Property Unit
2340); conduit, floor boxes, power boxes, and outlet jacks
relating to telephone equipment (Property Unit 2330); electrical
wiring, conduit, and connections relating to internal
communications systems (Property Unit 3090); carpeting (Property
Unit 2140); vinyl wall coverings (Property Unit 2380); vinyl
floor coverings and special purpose sheet vinyl (Property Unit
2370); kitchen water piping (Property Unit 3080) and kitchen
equipment steam lines (Property Unit 3070); special plumbing
connections relating to x-ray equipment (Property Unit 2244);
kitchen hoods and exhaust systems (Property Unit 3085); patient
corridor handrails (Property Unit 3190); overbed lights and
related electrical connections (Property Unit 4050); accordion
doors/partitions (Property Unit 3240); bathroom accessories and
partitions (Property Unit 2360) and plastic mirrors (Property
Unit 2385); acoustical tile ceilings (Property Unit 2260); and
steam boilers and related accessories (Property Unit 3193). On
brief, respondent groups the disputed property in a similar
manner except that respondent separates the property items
petitioners included in Property Units 2200, 2244, 2320, 3026,
3075, 3195, 3280, 3292, 3298, 4040 (disputed property items
relating to branch electrical wiring, etc.), Property Unit 2330
(disputed property items relating to telephone equipment),
Property Unit 2340 (disputed property items relating to
television equipment), and Property Unit 3090 (disputed property
items relating to internal communications systems) into
individual categories of conduit; electrical wiring; and
electrical outlets, receptacles, and junction boxes.
Additionally, respondent combines the property items petitioners
included in Property Units 3080 and 3070 (kitchen water piping
and kitchen equipment steam lines) and Property Unit 2244
(plumbing connections relating to x-ray equipment) into one
category of plumbing. We adopt generally in the instant opinion
the denomination of categories utilized by petitioners.
                               - 9 -

     1.   Primary and Secondary Electrical Distribution Systems

     The primary electrical distribution systems,6 which the

parties have designated as Property Unit 1900, accept electricity

from outside electrical power sources and deliver it to the

secondary electrical distribution systems contained within the

hospital facilities.   Generally, the items comprising the primary

electrical distribution systems consist of (1) the electrical

wire and conduit extending from the outside power sources to the

main electrical distribution panels and (2) the main electrical

distribution panels themselves, also known as main switchgears.

In some instances, motor control centers or transformers also may

be included.

     The secondary electrical distribution systems receive

electricity from the primary electrical distribution systems and

deliver it to the various electrical end-users located throughout

petitioners' hospital facilities (e.g., lighting fixtures, fire

protection systems, and hospital equipment).   The items

comprising those secondary electrical distribution systems

consist of the electrical wire and conduit extending from the

primary electrical distribution panels to the secondary

electrical distribution panels, the secondary electrical

6
    Respondent agrees that the items comprising petitioners'
primary and secondary electrical distribution systems are similar
to those items in issue in Morrison, Inc. v. Commissioner, T.C.
Memo. 1986-129, affd. 891 F.2d 857 (11th Cir. 1990).
                               - 10 -

distribution panels themselves, and any transformers located

between the primary electrical distribution panels and the

secondary electrical distribution panels.

     The main switchgears and the motor control centers are steel

cabinets which are attached to concrete pedestals using nuts that

are tightened onto bolts extending out of the pedestals.

Transformers have a construction similar to that of the

switchgears and the motor control centers and are either attached

to concrete pedestals in a manner similar to the switchgears and

the motor control centers or suspended from the overhead

structural framework of the hospital buildings using threaded rod

hangers.    Screws or bolts attach the electrical panels to the

walls of the buildings.

     The main panel and the main motor control centers range in

size from 91.5 inches high by 40 inches wide by 20 inches deep up

to 91.5 inches high by 60 inches wide by 20 inches deep.   The

main panel is equal to or larger in size than the motor control

centers.    The conduit from the main transformer to the main

switchboard is 42 inches underground and encased in a concrete

envelope.

     The components of the primary and secondary electrical

systems are similar in nature, although they vary in size and

complexity depending on the various electrical loads carried by

them.   Those components are installed during the construction
                               - 11 -

phase by the electrical subcontractor.   The conduit and wire in

both the primary and secondary electrical distribution systems

are custom fit for the initial place of installation.

     The electrical wire constitutes the conductor used to carry

electrical power from the primary electrical distribution systems

to the secondary electrical distribution systems and from the

secondary electrical panels to various branch wiring items (e.g.,

circuit breakers, fuses).   The electrical wire carries electrical

power to the secondary electrical panels and the branch circuits

for individual electrical loads.

     Electrical wire is installed in electrical conduit.

Electrical conduit is typically aluminum, plastic, or galvanized

tubing or piping which is custom fit for the particular

application.   Electrical conduit may be attached to the

structures of the hospital buildings using screws and brackets or

other appropriate fasteners.   Electrical conduit serves as a

protective shield for electrical wire contained inside the

conduit and provides a pathway for the wire to travel from one

location to another.   The conduit is integrated into a building

during the construction phase and is generally attached to

ceilings, floors, and walls, or encased in concrete.

Conduit may be inaccessible or hidden behind surfaces.     Conduit

commonly is abandoned in place and not reused when a particular

item of equipment to which it relates is moved or retired.
                                - 12 -

     Although not a common occurrence, petitioners have moved and

reused some items (e.g., electrical panels, transformers, and

motor control centers) in connection with remodeling projects.

Workers started and completed the task in one evening.    The items

were not damaged by being moved from one location within the

hospital to another, and after they were moved, the items

functioned in the same manner as they had prior to being moved.

     The parties have stipulated that the percentage of the

electrical load carried by the primary and secondary electrical

distribution systems to hospital equipment is as follows:

           Type of facility               Percentage

           Large   Medical/Surgical           30
           Small   Medical/Surgical           36
           Small   Psychiatric                23
           Large   Psychiatric                26

The balance of the electrical load is carried to items related to

the operation or maintenance of petitioners' buildings.

     2.   Branch Electrical Wiring and Connections and Special
          Electrical Equipment

          a.   In General

     The branch wiring in the subject category is the wiring that

extends from the secondary distribution panels to either a duplex

outlet at or in a wall surface, or, in instances where a piece of

machinery is "hardwired",7 to a junction box mounted on or within

7
    When equipment is "hardwired", the wiring connection of that
equipment is attached and secured directly to the electrical
                                                   (continued...)
                              - 13 -

a surface of the building.   The branch electrical wiring and

connections consist of conduit, wiring, and electrical

connections which relate to particular items of hospital

equipment.   Specifically, the items of hospital equipment to

which the branch electrical wiring and connections in the subject

category relate are:   (a) The emergency power generator controls,

battery packs, and battery chargers (Property Unit 2200); (b) the

x-ray film processing equipment (Property Unit 2244); (c) the

illuminated front entrance signs and emergency entrance signs

(Property Unit 2320); (d) the medical gas control equipment and

the medical gas alarm equipment (Property Unit 3026); (e) kitchen

equipment (e.g., braising pans, sanitizers, deep fryers,

toasters, ice makers/dispensers, and heat lamps) (Property Unit

3075); (f) equipment located in the hospital laboratories and

maintenance shop areas, such as tools and welding equipment,

specimen slicers, etc. (Property Unit 3195); (g) the

synchronously wired clock systems (Property Unit 3280); (h) the

air conditioners located in the hospital computer rooms (Property

Unit 3292); (i) the central sterilization equipment (Property

Unit 3298); and (j) special electrical equipment located in the

hospital operating rooms, recovery rooms, intensive care units,

infant nurseries, radiology areas, patient rooms, and

7
   (...continued)
wiring in a junction box.
                              - 14 -

laboratories (Property Unit 4040).     Items of equipment for which

electrical connections are wired directly to the hospitals'

electrical systems include the front entrance sign, the emergency

entrance sign, the air conditioner for the computer equipment,

and the central sterilization equipment.

     The branch electrical wiring and connections are required

for the operation and use of the equipment to which they relate.

The branch electrical wiring and connections are used only with

the items of equipment to which they relate.8

     All of the electrical load carried by the branch electrical

wiring and connections is carried to the particular items of

equipment to which they relate.   The conduit protects and houses

the wiring.

          b.   Wiring and Related Property Items Relating to
               Kitchen Equipment (Property Unit 3075)

     The disputed property items in Property Unit 3075 consist of

wiring, conduit, junction boxes, and outlets that provide

electricity required for the operation and use of hospital

kitchen equipment, including the kitchen hood fans and lights,

braising pans, sanitizers, deep fryers, toasters, ice

makers/dispensers, coffee urns, milk and ice cream dispensers,

and heat lamps.   Those items are used only with the hospital

8
    The parties agree that the items of equipment to which the
branch electrical wiring and connections in issue relate are
properly depreciable over 5-year periods.
                               - 15 -

kitchen equipment.   If necessary, some of the items could be

adapted for another use.   In most instances, the items run from

the hospitals' secondary electrical distribution systems to a

wall near the equipment which they are intended to service.

          c.    Wiring and Related Property Items in the Laboratory
                and Maintenance Shop (Property Unit 3195)

     The disputed property items in Property Unit 3195 consist of

wiring, conduit, above-counter receptacles, circuit boxes, and

plugmoldings which make electricity available in the laboratory

and maintenance shop areas of the hospitals and provide localized

electrical power for various electrical end-users located in

those areas.9   Some of the items described in Property Unit 3195

are located in the walls between the hospitals' secondary

electrical distribution systems and either electrical outlets or

the particular equipment they are intended to serve.   If

necessary, some of those items could be adapted for another use.

          d.    Wiring and Related Property Items in Other
                Areas of the Hospitals (Property Unit 4040)

     The disputed property items in Property Unit 4040 consist of

wiring, conduit, outlets, circuit boxes, and related electrical

isolation panels which make electricity available for the

operation and use of equipment located in the intensive care

9
    Other wiring, conduit, receptacles, and junction boxes, which
are not contained in Property Unit Number 3195 but which the
parties agree relate to the operation and maintenance of the
hospitals' buildings, also make electrical power available in the
laboratory and maintenance shop areas.
                               - 16 -

units, operating rooms, recovery rooms, infant nurseries, patient

rooms, radiology areas, laboratories, and kitchens.    The

isolation panels and grounding receptacles ensure that the

medical equipment receiving electrical power from the isolated

electrical circuits does not leak electricity, which could shock

patients undergoing surgery or other forms of treatment.     The

remote grounding receptacles are necessary for the common

grounding of equipment in those areas of the hospitals and are

necessary for the operation of the isolation panels.

     3.   Wiring and Related Property Items Relating to Television
          Equipment (Property Unit 2340)

     Disputed property items in Property Unit 2340 consist of

branch electrical wiring, conduit, junction boxes, outlet

receptacles, and equipment that is required for the operation and

use of the television equipment located in and outside of the

hospitals.   Petitioners' use of the conduit and junction boxes is

due, in part, to local building codes.   The items are used only

and directly with the television sets located in petitioners'

hospital facilities and the master television antennae attached

to petitioners' hospitals.10

     Televisions are attached to the walls of the hospitals near

the room ceilings.   The television outlet receptacles in issue

10
    The television antenna and antenna wire are not in dispute.
The parties have agreed that the antenna, amplifier, and brackets
constitute 5-year property.
                              - 17 -

are recessed in the walls approximately 18 inches below the

acoustical tile ceilings.   The electrical outlet receptacles

relating to the televisions provide localized electrical power

sources for the televisions at standardized voltages and

standardized amperes.   Most of the televisions are located in the

patient rooms of petitioners' hospitals.

     The antenna conduit protects the television antenna cables

which extend between the master television antenna systems (or

cable television hook-ups) and the antenna/cable television

outlets located adjacent to the television outlet receptacles.

The conduit protects the antenna wiring contained within it and

is installed for the specific purpose of housing the television

antenna wiring.

     4.   Conduit, Floor Boxes, Power Boxes, and Outlet Jacks
          Relating to Telephone Equipment (Property Unit 2330)

     The telephone conduit, floor boxes, power boxes, and outlet

jacks in Property Unit 2330 are required for the use and

operation of the telephone equipment11 located in petitioners'

hospitals, due in part at least to local building codes.   Those

items are used only and directly with that telephone equipment

and were installed specifically for use with the telephone

equipment.

11
    The parties agree that the telephone equipment to which the
items in Property Unit 2330 relate is properly depreciable over
5-year periods.
                              - 18 -

     5.   Electrical Wiring, Conduit, and Connections Relating to
          Internal Communications Systems (Property Unit 3090)

     The conduit, wiring, and electrical connections in Property

Unit 3090 are required for the use and operation of the

hospitals' internal communications systems (i.e., the nurse call

systems, the intercommunications systems, the dictation systems,

and the music and paging systems).12   Petitioners' use of the

conduit, floor boxes, and outlet jacks is due in part to local

building codes.   Those items are used only and directly with the

equipment comprising those systems.    The items in issue are

attached to the walls, floors, and ceilings of petitioners'

hospitals and are located between the secondary electrical

distribution systems and the particular items of equipment to

which they relate.   The items are specifically for use with the

hospitals' internal communication systems.

     6.   Carpeting (Property Unit 2140)

     The carpeting in Property Unit 2140 is the carpeting that

was originally placed in petitioners' hospital facilities during

construction.   The carpeting is custom fit to the area in which

it is laid, and is installed over the sealed concrete floor using

adhesives.   The adhesives prevent the carpeting from slipping or

skidding while it covers the floors of the hospitals.

12
    The parties agree that the machinery and equipment to which
the items in Property Unit 3090 relate are properly depreciable
over 5-year periods.
                              - 19 -

     Petitioners typically replace carpeting after approximately

2-1/2 to 7 years of use due to heavy wear, soiling, and changes

in the decor of petitioners' hospitals.13   Workers remove the

carpeting by using a linoleum knife to lift up one corner of the

carpeting and then by pulling the carpeting by hand from the

concrete floors.   Removal of the carpeting is not a difficult or

time-consuming process and does not damage the underlying

concrete floors.   Petitioners typically discard the removed

carpeting.   Petitioners do not allow the removed carpeting to be

reused because of potential health risks.

          7.   Vinyl Wall Coverings (Property Unit 2380)

     The vinyl wall coverings originally placed in the various

hospital facilities are also in issue.   The wall coverings

consist of 3-foot or 4-foot wide strips of vinyl fabric.    The

strips of vinyl fabric are secured to the walls with an adhesive.

The walls are treated with glue sizing prior to placing the vinyl

wall coverings on the sheetrock walls of the hospital facilities.

The glue sizing protects the sheetrock walls from being damaged

upon a subsequent removal of the wall coverings.

     The vinyl wall covering is used as an alternative to

painting the sheet rock walls.   Due to heavy wear and to changes

13
    In one of the representative facilities, after approximately
8 years of use, more than 95 percent of the carpeting in issue
had been removed and replaced. Petitioners intend to replace the
remaining 5 percent of that carpeting, which is badly soiled and
worn, when scheduling permits.
                               - 20 -

in the decor of petitioners' hospital facilities, petitioners

remove and replace vinyl wall coverings after approximately 5 to

10 years of use.14

      Removal of the wall coverings is accomplished by removing

the base molding covering the bottom edge of the wall covering,

grasping a corner of the wall covering, and pulling it off the

walls.   Removal of the vinyl wall coverings does not damage

either the vinyl fabric or the sheetrock walls of the hospitals,

and any residual adhesives that remain on the walls can be

removed with very light sanding.

                8.   Vinyl Floor Coverings (Property Unit 2370)

     The items in Property Unit 2370 consist of the vinyl tile

and sheet vinyl floor coverings originally placed in petitioners'

hospital facilities during construction.   The floor coverings are

of three general types:   (1) 12-inch by 12-inch vinyl tiles, (2)

8-foot wide sheet vinyl, and (3) seamless vinyl floor covering.

     Petitioners utilize all three types of vinyl floor coverings

in a similar manner.   The vinyl tiles are unpackaged, trimmed as

necessary, and attached to the hospital floors using adhesive.

The sheet vinyl is first cut to fit the area on which it is

placed and also is attached to the concrete floors of the

hospitals using adhesive.   The seamless vinyl floor covering is

14
    In one of petitioners' representative facilities, after
approximately 8 years of use, approximately 60 to 65 percent of
the vinyl wall coverings in issue had been replaced.
                               - 21 -

installed similarly to the sheet vinyl but with its seams joined

together using heat.

     Petitioners replace vinyl floor coverings after about 3 to 5

years due to wear and changes in the decor of petitioners'

facilities.15   The sheet vinyl and seamless vinyl floor covering

are composed of a softer material than vinyl composition tile.

     Workers remove sheet vinyl by lifting one corner of the

vinyl and peeling it off the concrete floors.   Workers remove

vinyl tile by using a mechanical scraper, which lifts the tiles

off the concrete floors without damaging the floors.   The

underlying adhesives are typically dry and powdery after the

floor coverings are removed.   Removal of the vinyl tile floor

coverings requires more effort than is necessary for removing

carpeting; nonetheless, with the proper tools and skill, removal

of the vinyl floor coverings goes relatively fast.   Petitioners

discard the floor covering upon removal.

     9.   Kitchen Water Piping (Property Unit 3080) and Kitchen
          Equipment Steam Lines (Property Unit 3070)

     Petitioners maintain kitchens which are used to prepare

meals for most inpatients on a daily basis as a part of providing

health care services to those patients.    Petitioners also operate

15
    In one of petitioners' representative facilities, after
approximately 8 years of use, two-thirds of the original vinyl
floor coverings had been replaced.
                              - 22 -

hospital cafeterias where food is sold to hospital employees,

visitors, and the public for cash.

     The kitchen water piping in Property Unit 3080 consists of

the following distinct categories of items:   (1) items relating

to the operation of the kitchen grease trap systems,16 the trench

drains, the grease waste piping, the grease waste excavation, the

grease waste fill, and the grease trap itself, and (2) plumbing

connections (including the hose reel connections) for particular

items of kitchen equipment.   The piping is contained in the walls

of petitioners' hospital facilities and fastened to the building

structures.

     The kitchen grease trap systems consist of underground tanks

and the related plumbing connections.   The grease traps have

inlet chambers connected to kitchen waste pipes and outlet

chambers connected to the domestic sanitary sewers, and they

serve as buffers between the kitchen waste pipes and the sanitary

sewer systems.   Their function is to remove grease and solid

matter from waste water leaving the kitchen areas while allowing

the remaining waste water to pass into the sanitary sewers.

     The kitchen plumbing connections in issue supply water to

specific items of kitchen equipment, such as the dishwashers,

coffee urns, steam kettles, braising pans, and ice makers, and

16
    Respondent agrees that the kitchen grease trap systems in
issue are similar to those in issue in Morrison, Inc. v.
Commissioner, T.C. Memo. 1986-129.
                               - 23 -

remove the liquid wastes generated by that equipment.     The

plumbing connections branch off of a hospital's main water lines

to the walls near the specific pieces of equipment the plumbing

connections are intended to serve.      The plumbing connections are

necessary for the operation of the items of equipment to which

they relate and are used only with the items of equipment to

which they relate.    If necessary, the connections could be

adapted for other uses.    The hose reel connections are located

behind the walls and are used to connect the hose reel to hot and

cold potable water.

     The kitchen equipment steam lines in Property Unit 3070 are

in all material respects identical to the kitchen plumbing

connections (Property Unit 3080) described above.

     10.    Special Plumbing Connections Relating to X-Ray
            Equipment (Property Unit 2244)

     The plumbing connections relating to the x-ray equipment are

required for the operation and use of the x-ray film processing

equipment located in petitioners' hospitals.     Those connections

are used only with that equipment.      The plumbing connections are

located in the walls and floors between the hospitals' main

plumbing lines and the x-ray film processing equipment they are

intended to serve.    Removal of those plumbing connections would

not affect the hospitals' main water piping and sanitary

drainage.
                              - 24 -

     11.   Kitchen Hoods and Exhaust Systems (Property Unit 3085)

     The kitchen hoods and exhaust systems consist of the cooking

area exhaust hoods and fans, the kitchen supply air intake fans,

the dishwasher exhaust fans, and related duct work.   Dishwasher

condensate return units are also included.

     The exhaust hoods and fans are placed directly over the

kitchen cooking equipment, where they collect and guide cooking

vapors, grease, smoke, humidity, and other fumes moving from the

kitchen cooking equipment into the exhaust duct work to be

expelled outside of the hospital buildings.   The kitchen hoods

are installed on frames bolted to the overhead structure, and the

frames are attached to a reinforced concrete floor structure.

The sheet metal duct work is installed in a continuous run from

the kitchen hood through the floors overhead to a curbed roof

opening in a covered discharge unit.   The kitchen exhaust hoods

contain their own chemical fire protection and lighting system.

     The kitchen exhaust fans are attached with steel screws.

They do not serve to ventilate the hospital buildings generally,

and they are not part of the hospital buildings' heating,

ventilation, or air conditioning systems.

     The kitchen supply air intake fans (or the "air make-up

units")17 replace the air removed from the kitchens by the

17
    Respondent agrees that, with the exception of the condensate
return unit, although smaller, the kitchen supply air intake fans
                                                   (continued...)
                               - 25 -

kitchen exhaust fans to insure proper negative balance in the air

pressure.   The kitchen supply air intake fans ensure that a

hospital kitchen maintains negative pressure with relation to the

remainder of the hospital building by replacing air that is

exhausted by the kitchen exhaust fans.    The kitchen supply air

intake fans are attached to the roofs of petitioners' hospitals

using bolts and are connected to metal duct work used only with

that equipment.

     The dishwasher exhaust fans remove moisture and humidity

generated by the dishwasher and are vented to both ends of the

dishwasher.    The fans serve to ventilate only the dishwashing

area of the kitchens and ensure that the dishwashers operate

efficiently.    The fans are attached to the roofs of the

facilities using bolts and are connected to duct work

specifically designed for and used only with those fans.

     The dishwasher condensate return units consist of water

piping which provides an emergency source of hot water for the

dishwashers.    The piping is attached to the building and runs

from a dishwasher to a boiler and back to the dishwasher.    It is

separate and apart from the building plumbing and is used

exclusively to connect the dishwashers with the boilers.    Removal

17
   (...continued)
in petitioners' hospitals are similar to those in issue in
Morrison, Inc. v. Commissioner, supra.
                                - 26 -

of the condensate return unit piping would not affect the

hospital's main water piping and sanitary drainage.

     The kitchen duct work is placed in the walls and ceilings

during construction.   The duct work is fastened to the building

structure with steel hangers.    It is not movable without removal

of building walls and ceilings.    Portions may be removable but

that partial removal would render the remaining sections

unusable.    The sheet metal duct work, exhaust hoods, exhaust and

supply fans, and condensate return units are fixed to the

building with screws and bolts.    The frames are bolted and

welded.    Much of the installation is through walls, ceilings, and

roofs, and specific openings are made in the structure for those

items.

     12.    Patient Corridor Handrails (Property Unit 3190)

     Patient corridor handrails18 are strips of hard plastic,

about 1-3/4-inches at the top and 6-inches wide, which are

attached to the walls in certain areas of petitioners' hospitals

using bolts and clip brackets.    The patient corridor handrails

are placed approximately 32-inches above the hospital floors and

extend 3-1/2-inches from the wall surface.    They are installed in

18
    The patient corridor handrails in issue do not include
handrails located in hospital stairwells or those required by
elevation changes, nor do they include bumper guards, which are
located in all hallways and corridors and used to protect the
walls of petitioners' buildings.
                               - 27 -

patient corridors of the hospitals to assist in the

rehabilitation of petitioners' patients.

     Patient corridor handrails can be removed from the walls of

the hospitals.   After removal, the handrails can be replaced or

relocated within the hospital.

     Local fire or building codes do not require patient corridor

handrails.

     13.   Overbed Lights and Related Electrical Connections
           (Property Unit 4050)

     The overbed lights are 4-tube, 4-foot fluorescent lighting

fixtures installed in a standard opening in the acoustical

ceiling grid and are positioned directly over the patient beds in

each patient room.   They are similar in appearance to general

lighting fixtures.   The lights are controlled by switches located

on the headwall units above the patient bed headboards.   The

placement of the switches allows the overbed lights to be

activated by someone standing at the patient's bedside and makes

it difficult for a patient to activate the overbed light while

lying in bed.

     The overbed lights are designed to be used and are used to

provide a light source during the examination of patients by

medical staff or physicians.   The overbed lights are referred to

as "exam lights" on the hospital blueprints.

     The patient rooms are approximately 100 square feet in size.

Other lighting devices in the patient rooms also provide room
                               - 28 -

illumination.19   For example, each patient room contains a 2-tube

fluorescent light fixture which is attached to the wall just

above each patient bed headboard and which is activated by a pull

cord placed within the patient's reach.    Additionally, each

patient room contains a fluorescent light fixture placed over the

vanity cabinet located in the patient room area and a night light

that provides exit lighting during the night.    Furthermore, each

patient room contains one large double-pane window which

illuminates the patient rooms during the daylight hours.      Use of

the overbed lights may be uncomfortable for some patients because

of the brightness of the lights and of the placement of the

lights directly over a patient's bed.

     The electrical conduit, wiring, and junction boxes relating

to the overbed lights are used only with those lights, but, if

necessary, they could be adapted for other uses.    The electrical

connections relating to the overbed lights are necessary for the

operation of the overbed lights.

     14.    Accordion Doors/Partitions (Property Unit 3240)

     The accordion doors/partitions (partitions) in the subject

category consist of two different types of accordion-style room

dividers.    Both types are approximately 8- to 10-foot high and,

when expanded, are used to subdivide the hospital cafeterias and

conference rooms into smaller rooms.    They are attached to the

19
     Those lighting devices are not in issue.
                                - 29 -

hospital walls and are expanded and contracted by manually

pulling them along tracks attached to the ceilings.     The

partitions are suspended from those tracks.     The tracks are

mounted on 2-inch by 4-inch or 2-inch by 6-inch blocking, which

is attached to the ceilings of the hospital buildings and

supported from above by angled steel arms.     The partitions do not

bear any structural loads.     The partition located in the

cafeteria contains a door which allows passage through the

subdivided rooms when the accordion is fully extended.

      The partitions located in the hospital conference rooms

represent 44 percent of the total cost bases of the partitions in

issue.     The partitions located in the hospital cafeterias

represent the remaining 56 percent of the total cost bases of the

partitions in issue.

     The partition originally placed in a West Houston Medical

Center conference room has been removed and is currently in

storage.    Removal of the partition has not affected the essential

structure of the West Houston Medical Center.     The supporting

steel and wood for that partition still is attached to the

structural frame at the site of the original installation,

covered by the acoustical ceiling.

     15.    Bathroom Accessories and Partitions (Property Unit
            2360) and Plastic Mirrors (Property Unit 2385)

     Petitioners' hospital facilities contain a large number of

bathrooms in addition to employee bathrooms and public
                                - 30 -

bathrooms.20    The bathroom accessories in issue consist of the

following items located in patient bathrooms of petitioners'

hospitals:     Paper towel dispensers, soap dispensers, mirrors,

towel racks, grab bars, toilet paper holders, bathrobe hooks,

shower curtain rods, and toiletry shelves.    Petitioners' staff

and employees do not use the patient bathrooms, except as

necessary to provide health care services to the patients.

     Toilet accessories such as grab bars require support by

double studding behind the walls.     The bathroom accessories are

attached to either the walls or the doors of the patient

bathrooms using screws.    They can be removed from the walls of

the bathrooms by removing the screws and backplates attaching

them to the walls.    Removal of those items does not damage either

the items or the walls.    Removal of the items is not a time-

consuming or difficult process, and one of the items typically

could be removed from a wall within 1 minute.     If removed, the

items could be reused elsewhere if the necessary blocking is in

place.       The plastic mirrors included in Property Unit 2385 are

in all material respects identical to the mirrors located in the

patient rooms which are included in Property Unit 2360.

20
    Petitioners concede that the bathroom accessories in
Property Unit 2360 located in non-patient bathrooms (i.e., the
employee and public bathrooms) relate to the operation or
maintenance of a building and thus constitute structural
components of the buildings. Seventy-five percent of the total
cost of the bathroom accessories included in Property Unit 2360
is attributable to the bathroom accessories located in patient
bathrooms.
                                - 31 -

     16.    Acoustical Tile Ceilings (Property Unit 2260)

     The acoustical tile ceilings (acoustical ceilings) consist

of metal grid systems, typically with a 2-foot by 2-foot or 2-

foot by 4-foot opening, and squares of acoustical tile that are

laid into the openings of the grids.      The grids are installed in

select areas of petitioners' hospital facilities and are hung by

wires parallel to the structural frames of the hospital

buildings, approximately 8- to 12-feet above the concrete floors.

The wires are attached to the structural frames of the hospital

buildings using eye bolts.     The grids are attached to the

hospital walls using nails or screws.      Light fixtures, speakers,

air conditioning vents, and sprinkler heads are placed in

openings of the grids or through openings cut in the tiles.

     The acoustical ceilings are movable and have been moved,

reconfigured, and reused by petitioners in at least one of

petitioners' representative facilities.      Acoustical ceilings hide

unsightly plumbing and piping, conduit, wiring, and air

conditioning ducts which are installed between the structural

frame above and the ceiling.     The acoustical ceilings also

enhance the cleanliness of petitioners' hospitals by preventing

dirt and dust from falling from the pipes and duct work located

between the acoustical ceilings and the structural ceilings of

the hospitals into the areas below.      Acoustical tiles

additionally provide a sound deadening material, which reduces

noise.     They also serve a decorative function.
                              - 32 -

     The acoustical ceilings utilized by petitioners are typical

of the ceilings used in many commercial buildings.   Painted

gypsum board is used for ceilings in the critical areas of the

hospitals, such as the operating, trauma, and medical areas.

Hospital accreditation commissions require hospitals to have

ceilings in order to operate as hospitals.

     17.   Steam Boilers and Related Accessories (Property Unit
           3193)

     The steam boiler systems in Property Unit 3193 are shop-

assembled, high-pressure, steam-operated boilers and related

accessories.   The steam boilers produce steam that is used to

provide heat for petitioners' hospitals and that is distributed

to specific items of hospital equipment, such as the air make-up

units, hot water heaters, kitchen equipment, operating room

humidifiers, and central sterilization equipment.

     The boilers and related accessories are bolted to structural

steel frames, which are encased in a concrete slab, raised floor.

Bolts, embedded into the concrete, are used both to level the

boilers and to secure the installation.   The boiler stacks are

attached to the structural roof and extend through the roof to an

elevation which facilitates the dispersion of fumes.

     The boilers and related accessories are placed in the

mechanical room and are interconnected with the piping used to

transmit the high temperature water and steam.   The entire system

is integrated into the building mechanical system.
                               - 33 -

     Boilers are not easily removed.     The installation and/or

removal of a boiler would require a skilled mechanical

subcontractor.

                               OPINION

     During taxable years ended 1985 through 1988, petitioners

constructed a number of hospital facilities, which they used in

their trade or business.   For purposes of our decision as to

petitioners' entitlement to depreciation deductions relating to

those facilities for those taxable years, the parties do not

agree on the appropriate recovery classes or recovery periods for

the disputed property items21 contained in the facilities.

Resolution of that issue entails our decision as to whether the

disputed property items constitute section 1245 class property or

section 1250 class property.   The parties have stipulated that if

a disputed property item constitutes section 1245 class property,

it is depreciable over a 5-year recovery period, but if the

disputed property item constitutes section 1250 class property,

it is depreciable over an 18-, 19-, or 31.5-year recovery period

(depending on when the item was placed in service).22

21
    The parties have agreed on the classification of a number of
property items relating to the constructed facilities, but they
are unable to agree as to the disputed property items described
supra.
22
     The recovery period for real property placed in service
after March 15, 1984, but before May 9, 1985, generally is 18
years. Deficit Reduction Act of 1984 (DRA-1984), Pub. L. 98-369,
sec. 111, 98 Stat. 634; Simplification of Imputed Interest Rules
                                                   (continued...)
                             - 34 -

Accordingly, we must decide whether the tests developed under

prior law for purposes of the investment tax credit must be used

in deciding the appropriate recovery classes (for tax years ended

1985 and 1986) or appropriate recovery periods (for tax years

ended 1987 and 1988) for the disputed property items that

petitioners placed in service during those years and, if so,

whether the respective properties constitute section 1245 class

property or section 1250 class property pursuant to those tests.

     Petitioners contend that the disputed property items

constitute section 1245 class property and that those items are

depreciable over 5-year periods.   Respondent contends that the

disputed property items are section 1250 class property because

they are structural components of the buildings to which they

relate, and, thus, they are depreciable over the same recovery

period as the buildings.

22
   (...continued)
(SIIR), Pub. L. 99-121, secs. 103, 105(a), 99 Stat. 509-511
(1985). The recovery for real property placed in service after
May 8, 1985, but before Dec. 31, 1986, generally is 19 years.
SIIR, secs. 103, 105(a); Tax Reform Act of 1986 (TRA-1986), Pub.
L. 99-514, secs. 201, 203, 100 Stat. 2122-2123, 2143. The
recovery period for nonresidential real property placed in
service after Dec. 31, 1986, but before May 12, 1993, generally
is 31.5 years. TRA-86, secs. 201, 203; Omnibus Budget
Reconciliation Act of 1993 (OBRA-1993), Pub. L. 103-66, sec.
13151, 107 Stat. 448. For convenience, we refer to property
placed in service between Jan. 1, 1985, and Dec. 31, 1986,
generally as 19-year property.
                              - 35 -

In General

     Section 167 prescribes general rules governing the

depreciation deduction, which provides a reasonable allowance for

the exhaustion, wear and tear of property used in a trade or

business or held for the production of income.    Section 168,

added to the Internal Revenue Code (Code) by the Economic

Recovery Tax Act of 1981 (ERTA), Pub. L. 97-34, 95 Stat. 172,

describes a specific depreciation system, entitled "Accelerated

Cost Recovery System" (ACRS), applicable generally for tangible,

depreciable property placed in service after December 31, 1980.

ERTA, secs. 201(a), 209(a), 95 Stat. 226.    During 1986, Congress

replaced ACRS with a modified accelerated cost recovery system

(MACRS), effective generally for tangible, depreciable property

placed in service after December 31, 1986.    Tax Reform Act of

1986 (TRA-86), Pub. L. 99-514, secs. 201, 203, 100 Stat. 2122-

2123, 2143.   Accordingly, the disputed property items placed in

service during 1985 and 1986 are subject to the ACRS rules, and

the disputed property items placed in service after 1986 are

subject to the MACRS rules.

     ACRS

     Congress enacted ACRS to stimulate the economy by allowing

greater depreciation deductions over shorter depreciation periods

and to simplify the depreciation rules.     Sprint Corp. v.

Commissioner, 108 T.C. 383 (1997); Simon v. Commissioner, 103

T.C. 247, 255 (1994), affd. 68 F.3d 41 (2d Cir. 1995); Liddle v.
                                - 36 -

Commissioner, 103 T.C. 285, 289, 290 (1994), affd. 65 F.3d 329

(3d Cir. 1995); see also Collins Music Co. v. United States, 21

F.3d 1330, 1332 (4th Cir. 1994); S. Rept. 97-144, at 47 (1981),

1981-2 C.B. 412, 425.    ACRS permits a depreciation deduction for

recovery property over a predetermined recovery period by

applying a statutory percentage to its cost.     Sec. 168(b); Schrum

v. Commissioner, T.C. Memo. 1993-124, affd. in part and vacated

and remanded in part on another issue 33 F.3d 426 (4th Cir.

1994).

     Recovery property is defined generally as "tangible property

of a character subject to the allowance for depreciation--(A)

used in a trade or business, or (B) held for the production of

income."    Sec. 168(c)(1).   Recovery property is assigned to one

of the following classes of property:     3-year property, 5-year

property, 10-year property, 19-year real property, 15-year public

utility property, or low-income housing.     Sec. 168(c)(2).   A

special rule applies for theme parks.     Sec. 168(c)(2)(G).

     Five-year property includes section 1245 class property

which is not 3-year property, 10-year property, or 15-year public

utility property.    Sec. 168(c)(2)(B).   Five-year property, thus,

includes section 1245 class property with no assigned class life.

Sec. 168(c)(2)(B); Collins Music Co. v. United States, supra at

1333.    Nineteen-year real property "means section 1250 class

property which--(i) does not have a present class life of 12.5
                              - 37 -

years or less, and (ii) is not low-income housing."    Sec.

168(c)(2)(D).

     The present class life of a property item is "the class life

(if any) which would be applicable with respect to any property

as of January 1, 1981, under subsection (m) of section 167

(determined without regard to paragraph (4) thereof and as if the

taxpayer had made an election under such subsection)."23      Sec.

168(g)(2).   Additionally, respondent may prescribe a present

class life that reasonably reflects the anticipated useful life

of the property for any property that did not have a present

class life as of January 1, 1981.   Sec. 168(g)(2).   Class life

refers to the class life of property assigned by respondent that

reasonably reflects the anticipated useful life of that class of

property to a particular industry or other group.     Sec. 167(m);

23
    Sec. 167(m) was repealed as an obsolete provision by the
Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508, sec.
11812, 104 Stat. 1389-534. Prior to its repeal, sec. 167(m)
provided as follows:

     SEC. 167(m) Class Lives.--

          (1) In General.--In the case of a taxpayer who has
     made an election under this subsection for the taxable year,
     the term "reasonable allowance" as used in subsection (a)
     means (with respect to property which is placed in service
     during the taxable year and which is included in any class
     for which a class life has been prescribed) only an
     allowance based on the class life prescribed by the
     Secretary which reasonably reflects the anticipated useful
     life of that class of property to the industry or other
     group. The allowance so prescribed may (under regulations
     prescribed by the Secretary) permit a variance from any
     class life by not more than 20 percent (rounded to the
     nearest half year) of such life.
                                - 38 -

see sec. 1.167(a)-11, Income Tax Regs.       Accordingly, ACRS

incorporates by reference the Asset Depreciation Range (ADR)24

classifications.   Sec. 168(g)(2); Walgreen Co. v. Commissioner,

68 F.3d 1006, 1008 (7th Cir. 1995), revg. and remanding on

another issue 103 T.C. 582 (1994).       ACRS reduces the number of

property classes from around 125 under the ADR system to six

(five as originally enacted).    Sec. 168(c)(2); Sprint Corp. v.

Commissioner, supra.

     In several revenue procedures, respondent had prescribed

asset guideline classes, asset guideline periods (class lives)

and ranges, and annual asset guideline repair allowance

percentages for assets used in business, manufacturing, and other

activities.   E.g., Rev. Proc. 87-56, 1987-2 C.B. 674; Rev. Proc.

24
    Prior to ERTA, the principal method used to assign useful
lives for personal property was the ADR and class life system,
which was effective generally for assets placed in service after
1970 and before 1981. Walgreen Co. v. Commissioner, 103 T.C.
582, 586-588 (1994), revd. and remanded on another issue 68 F.3d
1006 (7th Cir. 1995); Simon v. Commissioner, 103 T.C. 247, 254-
255 (1994), affd. 68 F.3d 41 (2d Cir. 1995); Clinger v.
Commissioner, T.C. Memo. 1990-459; see also sec. 1.167(a)-(11),
Income Tax Regs. Pursuant to that system, assets were grouped
into approximately 125 different asset guideline classes and a
guideline life was assigned to each class. A range of years,
i.e., the ADR, was then provided for each class of personal
property. The taxpayer could use a useful life of up to 20
percent longer or 20 percent shorter than the guideline life
prescribed by respondent for particular classes of depreciable
property. For each asset account in the class, the taxpayer
selected either a class life or an ADR that was used as the
useful life for computing depreciation. Sprint Corp. v.
Commissioner, 108 T.C. 384 (1997); Walgreen Co. v. Commissioner,
supra; Simon v. Commissioner, supra; Clinger v. Commissioner,
supra.
                                 - 39 -

83-35, 1983-1 C.B. 745.      The revenue procedures provide ADR

classes for specified depreciable assets generally used in all

business activities, except as noted, as well as for depreciable

assets used in certain businesses.        Rev. Proc. 83-35, supra, is

applicable for assets placed in service during years ended 1985

and 1986.    The present class life is the asset guideline period

(i.e., the midpoint class life) established for the particular

class.    Rev. Proc. 83-35, sec. 101, 1983-1 C.B. at 745.

     The component method of depreciation is not permitted under

ACRS.    Sec. 168(f)(1).25   The component method of depreciation is

25
     Sec. 168(f) provides in pertinent part as follows:

     SEC. 168(f) Special rules for application of this section.
     --For purposes of this section--

            (1)   Components of section 1250 class property.--

                 (A) In general.--Except as otherwise provided in
            this paragraph--

                       (i) the deduction allowable under subsection
                  (a) with respect to any component (which is
                  section 1250 class property) of a building shall
                  be computed in the same manner as the deduction
                  allowable with respect to such building, and

                       (ii) the recovery period for such component
                  shall begin on the later of--

                            (I) the date such component is placed in
                       service, or

                            (II) the date on which the building is
                       placed in service.

            (B) Transitional rules.

                                                         (continued...)
                                   - 40 -

a method of depreciation that "fragments an item of property,

often a building, into its elements (e.g., shell, plumbing, and

wiring) and applies individual useful lives and salvage values to

each such component."       Westin, Lexicon of Tax Terminology 127

(1984); see also Shainberg v. Commissioner, 33 T.C. 241 (1959);

sec. 1.167-7, Income Tax Regs.

      Accordingly, the parties agree that the disputed property

items placed in service during 1985 and 1986 constitute 5-year

property, as petitioners contend, only if the items constitute

section 1245 class property, and do not constitute structural

components of section 1250 class property, as respondent contends

they do.

      MACRS

      MACRS provides that the "depreciation deduction provided by

section 167(a) for any tangible property shall be determined by

using--(1) the applicable depreciation method, (2) the applicable

recovery period, and (3) the applicable convention."       Sec.

168(a).    For purposes of the general depreciation system, which

is involved in the instant case, MACRS generally classifies

25
     (...continued)
            *       *          *       *       *       *        *

              (C)   Exception for substantial improvements.--

                         (i) In general. For purposes of this
                    paragraph, a substantial improvement shall be
                    treated as a separate building.
                                - 41 -

eligible personal property and certain real property as 3-year

property, 5-year property, 7-year property, 10-year property, 15-

year property, or 20-year property, and assigns that property to

a corresponding recovery period on the basis of the property's

class life.     Sec. 168(c), (e)(1), (e)(3).   MACRS generally

classifies section 1250 real property as residential rental

property (which is not involved in the instant case) or

nonresidential real property,26 which are assigned to a 27.5-year

recovery period or a 31.5-year recovery period,27 respectively.

Sec. 168(c), (e)(2).

     Section 168(i)(1) provides that the term "class life" means

"the class life (if any) which would be applicable with respect

to any property as of January 1, 1986, under subsection (m) of

section 167".    That class life generally is the midpoint class

life for the asset guideline class to which the property was

assigned as of January 1, 1986, pursuant to Rev. Proc. 83-35,

26
    Sec. 168(e)(2)(B) defines nonresidential real property as
follows:

     (B) Nonresidential real property.--The term "nonresidential
     real property" means section 1250 property which is not--

          (i) residential rental property, or

          (ii) property with a class life of less than 27.5
     years.
27
    OBRA-1993, sec. 13151, 107 Stat. 448, extended to 39 years
the recovery period for nonresidential real property placed in
service after May 12, 1993.
                                - 42 -

1983-1 C.B. 745.28    Rev. Proc. 87-56, sec. 2.20, 1987-2 C.B. at

674.    Section 168(i)(1)(B) provides that, except in the case of

residential rental property or nonresidential real property,

respondent may designate a class life for any property which does

not have a prescribed class life as of January 1, 1986, or,

within restrictions, may modify the class life of property.29

See sec. 168(i)(1)(D).    Additionally, section 168(e) assigns

recovery periods to certain tangible, depreciable property

regardless of its class life.    Sec. 168(e)(3).   Rev. Proc. 87-56,

section 5, 1987-2 C.B. 674, as clarified and modified by Rev.

Proc. 88-22, 1988-1 C.B. 785, prescribes class lives and recovery

periods applicable for years ended 1987 and 1988.

       MACRS repealed ACRS section 168(f)(1), which related

specifically to components of section 1250 class property.

Section 168(i)(6),30 however, provides that improvements made to

28
    With the exception of telephone central office equipment for
which a class life was delineated in Rev. Proc. 82-67, 1982-2
C.B. 853, the class lives for property as of Jan. 1, 1986, for
property that had assigned class lives, remained the same as
their class lives as of Jan. 1, 1981. See Collins Music Co. v.
United States, 21 F.3d 1330, 1333-1334 (4th Cir. 1994); Rev.
Proc. 83-35, sec. 1.01, 1983-1 C.B. 745, 745.
29
    Congress repealed respondent's authority to prescribe or
modify class lives in sec. 6253 of the Technical and
Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat.
3753.
30
       Sec. 168(i)(6) provides as follows:

            (6) Treatments of additions or improvements to
       property.--In the case of any addition to (or improvement
                                                     (continued...)
                              - 43 -

real property are depreciated using the same recovery period

applicable to the underlying property as if the underlying

property were placed in service at the time the improvements were

made.   Accordingly, MACRS continues the prohibition against the

use of the component method of depreciation.   S. Rept. 99-313, at

105 (1986), 1986-3 C.B. (Vol. 3) 105.

      Congress did not assign a specific class life to the

disputed property items placed in service during 1986 and 1987.

See sec. 168(e)(3).   Accordingly, the parties agree that the

disputed property items constitute 5-year property, as

petitioners contend, only if the items have a class life of more

than 4 years but less than 10 years pursuant to Rev. Proc. 87-56,

as clarified and modified by Rev. Proc. 88-22, sec. 168(c),

(e)(1), and the disputed property items do not constitute

30
     (...continued)
       of) any property--

                (A) any deduction under subsection (a) for such
           addition or improvement shall be computed in the same
           manner as the deduction of such property would be
           computed if such property had been placed in service at
           the same time as such addition or improvement, and

                (B) the applicable recovery period for such
           addition or improvement shall begin on the later of--

                     (i) the date on which such addition (or
                improvement) is placed in service, or

                     (ii) the date on which the property with
                respect to which such addition (or improvement)
                was made is placed in service.
                               - 44 -

structural components of nonresidential real property, as

respondent contends they do.

The Meaning of Section 1245 Class Property Under ACRS and MACRS.

     Respondent does not dispute for purposes of the instant case

that petitioners' business is described in Asset Guideline Class

57.0 (Class 57.0).    Rev. Proc. 83-35, 1983-1 C.B. at 762, and

Rev. Proc. 87-56, 1987-2 C.B. at 686, describe Class 57.0 as

follows: "Distributive Trades and Services:      Includes assets used

in wholesale and retail trade, and personal and professional

services.    Includes section 1245 assets used in marketing

petroleum and petroleum products".      Both revenue procedures

prescribe a 9-year class life for assets in Class 57.0.      Rev.

Proc. 83-85, supra; Rev. Proc. 87-56, supra.      ACRS and MACRS both

provide that property with a 9-year class life is depreciable

over a 5-year period.    Sec. 168(c)(2)(B) (1985 and 1986); sec.

168(c), (e)(1) (1986 and 1987).    Consequently, unless the

disputed property items constitute section 1250 class property,

they are depreciable over 5-year periods because petitioners'

businesses fall within the category "personal and professional

services".

     Petitioners contend that the disputed property items

constitute section 1245 class property pursuant to the Code,

relevant legislative history, relevant income tax regulations,

respondent's long-standing rulings, and prior decisions of this

Court and, therefore, are properly depreciable over 5-year
                               - 45 -

periods.    Petitioners maintain that the question of whether

property constitutes section 1245 or section 1250 property

frequently was presented to respondent and to the courts in the

context of whether property constituted tangible personal

property for purposes of qualifying for ITC and that a similar

analysis is appropriate for purposes of ACRS and MACRS.

     Respondent has raised a number of arguments in support of

the position that the disputed property items constitute section

1250 class property.   Respondent's principal argument is that

using a different recovery period for the disputed property items

than for the buildings to which they relate in effect results in

component depreciation, which method is no longer permitted under

ACRS and MACRS.    Respondent argues that the cases on which

petitioners primarily rely are not applicable to the instant case

because those cases involve tax years prior to 1981, when

component depreciation was permissible, and they deal with ITC.

Respondent asserts that the judicially developed ITC tests have

limited application in determining what constitutes a structural

component for purposes of applying ACRS and MACRS in light of the

elimination of the component method of accounting.    Respondent

maintains that the disputed property items must be depreciated

over the same recovery period as the structure to which they

relate.    Respondent's position raises an issue of first

impression.
                               - 46 -

     To resolve that issue, we look to the language of the

statute.    Because the relevant ACRS and MACRS provisions differ,

we discuss separately our conclusion that, in prohibiting

component depreciation, Congress did not intend to eliminate from

5-year property those disputed property items which would satisfy

the definition of tangible personal property pursuant to section

1245(a)(3)(A) prior to the enactment of ACRS or MACRS.

     ACRS

     As we discussed supra, to be classified as 5-year property

the disputed property items must constitute section 1245 class

property.   Sec. 168(c)(2)(B).31   Section 1245 class property

consists of "tangible property described in section 1245(a)(3)

other than subparagraphs (C) and (D)."32    Sec. 168(g)(3).33    On

31
    For taxable years ended 1984 and 1985, sec. 168(c)(2)(B)
provides as follows:

     (B) 5-year property.--The term "5-year property" means
     recovery property which is section 1245 class property and
     which is not 3-year property, 10-year property, or 15-year
     public utility property.
32
     Sec. 1245(a)(3) provides as follows:

          (3) Section 1245 Property.--For purposes of this
     section, the term "section 1245 property" means any
     property which is or has been property of a character
     subject to the allowance for depreciation provided in
     section 167 (or subject to the allowance of amortization
     provided in section 185) and is either--

                 (A) personal property,

               (B) other property (not including a building or
     its structural components) but only if such other
                                                   (continued...)
                               - 47 -

the other hand, to constitute 19-year real property, the property

must be section 1250 class property.    Section 1250 class property

32
     (...continued)
       property is tangible and has an adjusted basis in which
       there are reflected adjustments described in paragraph (2)
       for a period in which such property (or other property)--

                     (i) was used as an integral part of
                manufacturing, production, or extraction or of
                furnishing transportation, communications,
                electrical energy, gas, water, or sewage disposal
                services, or

                     (ii) constituted a research facility used in
                connection with any of the activities referred to
                in clause (i), or

                     (iii) constituted a facility used in
                connection with any of the activities referred to
                in clause (i) for the bulk storage of fungible
                commodities (including commodities in a liquid or
                gaseous state),

                (C) an elevator or an escalator,

                (D) so much of any real property (other than any
           property described in subparagraph (B)) which has an
           adjusted basis in which there are reflected adjustments
           for amortization under section 169, 179, 185, 188, 190,
           193, or 194,

                (E) a single purpose agricultural or horticultural
           structure (as defined in section 48(p)), or

                (F) a storage facility (not including a building
           or its structural components) used in connection with
           the distribution of petroleum or any primary product of
           petroleum.

33
    For taxable years ended 1984 and 1985, sec. 168(g)(3)
provides as follows:

      The term "section 1245 class property" means tangible
      property described in section 1245(a)(3) other than
      subparagraphs (C) and (D).
                                - 48 -

embodies "property described in section 1250(c)34 and * * * in

section 1245(a)(3)(C)."   Sec. 168(g)(4).35

     Petitioners are not engaged in an activity described in

section 1245(a)(3)(B).    Additionally, the disputed property items

are not described in section 1245(a)(3)(E) or (F).   Accordingly,

the disputed property items constitute section 1245 class

property only if they are personal property as defined in section

1245(a)(3)(A).   See also sec. 1.1245-3(a), Income Tax Regs.

     Section 1.1245-3(b)(1), Income Tax Regs., defines personal

property as "(1) Tangible personal property (as defined in

paragraph (c) of § 1.48-1, relating to the definition of 'section

38 property' for purposes of the investment credit)".

Accordingly, ACRS incorporates within the meaning of section 1245

class property tangible personal property defined in section

1.48-1(c), Income Tax Regs.36

34
     Sec. 1250(c) provides as follows:

     (c) Section 1250 Property. For purposes of this section,
     the term "section 1250 property" means any real property
     (other than section 1245 property, as defined in section
     1245(a)(3)) which is or has been property of a character
     subject to the allowance for depreciation provided in
     section 167.
35
    For taxable years ended 1984 and 1985, sec. 168(g)(4)
provides as follows:

     (4) Section 1250 class property. The term "section 1250
     class property" means property described in section 1250(c)
     and property described in section 1245(a)(3)(C).
36
     Sec. 1.48-1(c), Income Tax Regs., provides as follows:
                                                    (continued...)
                               - 49 -

      Nineteen-year real property consists of section 1250 class

property with a present class life of more than 12.5 years,

except for low-income housing as defined in section 168(c)(2)(F).

Sec. 168(c)(2)(D).   Section 1250 class property is property

described in section 1250(c) and in section 1245(a)(3)(C).     Sec.

36
     (...continued)
       (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.
                              - 50 -

168(g)(4).   Section 1250(c) defines section 1250 property to mean

"any real property (other than section 1245 property, as defined

in section 1245(a)(3))".   Section 1245(a)(3)(C) includes

elevators and escalators within the definition of section 1245

property.

     Section 1.1250-1(e)(3)(i), Income Tax Regs., defines real

property to include the structural components of a building

within the meaning of section 1.1245-3(c), Income Tax Regs.,

which provides in pertinent part that "the terms 'building' and

'structural components' shall have the meanings assigned to those

terms in paragraph (e) of § 1.48-1."37

37
     Sec. 1.48-1(e)(2) provides in pertinent part as follows:

     (2) 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. However, the term "structural components" does
     not include machinery the sole justification for the
     installation of which is the fact that such machinery is
     required to meet temperature or humidity requirements which
     are essential for the operation of other machinery or the
     processing of materials or foodstuffs. Machinery may meet
     the "sole justification" test provided by the preceding
     sentence even though it incidentally provides for the
     comfort of employees, or serves, to an insubstantial degree,
     areas where such temperature or humidity requirements are
     not essential. * * *
                               - 51 -

     The foregoing statutory and regulatory provisions support a

conclusion that Congress intended that the same tests be used to

ascertain whether property constitutes section 1245 class

property or section 1250 class property for purposes of ACRS as

are applied for purposes of determining whether property

qualifies for ITC.   See also Schrum v. Commissioner, 33 F.3d 426,

437 (4th Cir. 1994), affg. in part and vacating and remanding in

part on another issue T.C. Memo. 1993-124, where the Court of

Appeals observed:    "That the classes of section 38 property and

section 1245 property are, for present purposes, coextensive, is

confirmed by Treasury Regulation § 1.1245-3(b)(1), which, in

defining section 1245 property, makes several references to

Treasury Regulation § 1.48-1(c)."   (Fn ref. omitted.)

     Respondent, however, contends that section 168(f)(1),38

which prohibits component depreciation, effectively operates to

change the definition of tangible personal property for purposes

of ACRS to eliminate from section 1245 class property, and to

include in section 1250 class property, any item which is

attached to a building and that has utility beyond its relation

to a particular piece of property, even if under long-standing

precedent the property constitutes personal property for purposes

of section 38 and section 1245.   We, however, do not agree.

38
     See supra note 25.
                              - 52 -

     Section 168(f)(1) only could apply to property that

constitutes section 1250 class property as that term was

understood at the time Congress enacted ACRS.   Neither the

statute nor its legislative history reveals an intent by Congress

to redefine section 1250(c) to include property, which at that

time, was considered under long-standing precedent to constitute

section 1245 property.   Had Congress intended that outcome, we

believe Congress would have clearly set forth that intent in the

statute or in its legislative history.   To the contrary, the

statutory language supports petitioners' position.   Section

168(f)(1)(A)(i) provides that "the deduction allowable under

subsection (a) with respect to any component (which is section

1250 class property) of a building shall be computed in the same

manner as the deduction allowable with respect to such building".

(Emphasis added.)   Thus, the statutory provision plainly and only

speaks to section 1250 class property, which section 168(g)(4)

defines as property described in section 1250(c).    As discussed

supra, the regulations under section 1250(c) incorporate by

reference section 1.1245-3(c), Income Tax Regs., which

incorporates by reference section 1.48-1(e), Income Tax Regs.

Accordingly, we conclude that the statutory language manifests a

congressional intent to retain the prior law    distinction between

components that constitute section 1250 class property and

property items that constitute section 1245 class property.
                               - 53 -

     The legislative history does not reveal a contrary

intention.   The legislative history relating to section

168(f)(1)(A) does not focus on the definition of section 1250

class property or on the definition of structural components

contained in section 1.48-1(e), Income Tax Regs.   See H. Rept.

97-201, at 67-68, 84 (1981); S. Rept. 97-144 (1981), 1981-2 C.B.

412, 428.    Moreover, the General Explanation of ERTA prepared by

the staff of the Joint Committee on Taxation states as follows:

          The recovery period and method the taxpayer selects
     must be used for the building as a whole, including all
     structural components that are real property (e.g., wiring,
     plumbing, etc.). Component depreciation no longer may be
     used. The distinction between a structural component of a
     building, which is section 1250 property, and an item of
     property that is section 1245 property remains the same as
     under prior law.   * * * [Staff of the Joint Comm. on
     Taxation, General Explanation of the Economic Recovery Tax
     Act of 1981, at 85 (J. Comm. Print 1981). Emphasis added.]

     Additionally, see Staff of the Joint Comm. on Taxation,

General Explanation of the Tax Reform Act of 1986, at 90 (J.

Comm. Print 1987), summarizing the prohibition against the

component method of depreciation under ACRS as follows:

"Component cost recovery was not permitted under ACRS.     Thus, the

same recovery period and method had to be used for a building as

a whole, including all structural components."; see also H. Rept.

99-426, at 138 (1985), 1986-3 C.B. (Vol. 2) 138; S. Rept. 99-313,

99th Cong., 2d Sess. 88 (1986), 1986-3 C.B. (Vol. 3) 88.

     We note further that our understanding of the statutory

provision comports with the construction given that provision in
                             - 54 -

the report relating to the Small Business Job Protection Act of

1996, Pub. L. 104-188, 110 Stat. 1755,39 wherein the Senate

Finance Committee, in explaining present law relating to

depreciation of leasehold improvements, states as follows:

          If the improvement is characterized as tangible
     personal property, ACRS depreciation is calculated using the
     shorter recovery periods and accelerated methods applicable
     to such property. The determination of whether certain
     improvements are characterized as tangible personal property
     or as nonresidential real property often depends on whether
     or not the improvements constitute a "structural component"
     of a building (as defined by Treas. Reg. sec. 1.48-1(e)(1)).
     See, for example, Metro Natl. Corp. [v. Commissioner], 52
     TCM 1440 (1987) [T.C. Memo. 1987-38]; King Radio Corp. [v.
     United States], 486 F.2d 1091 (10th Cir. 1973);
     Mallinckrodt, Inc. [v. Commissioner], 778 F.2d 402 (8th Cir.
     1985) [affg. per curiam T.C. Memo. 1984-532] (with respect
     various leasehold improvements). [S. Rept. 104-281, at 16
     n.5 (1996).]

     We additionally note that for purposes of ascertaining ACRS

recovery periods section 1245 class property has the same

definition as personal property described in section 1.48-1(c),

Income Tax Regs., which comports with respondent's own

interpretation of section 168(f) promulgated in proposed

regulations under section 168 issued during 1984.40   See 49 Fed.

39
    We recognize that it is well settled that the view of a
later Congress as to the construction of a statute or a
regulation adopted is not entitled to great weight. E.g., CSI
Hydrostatic Testers, Inc. v. Commissioner, 103 T.C. 398, 415
(1994), affd. 62 F.3d 136 (5th Cir. 1995); Mars, Inc. v.
Commissioner, 88 T.C. 428, 435 (1987).
40
    The proposed regulations have not been amended to reflect
changes to sec. 168 made by the TRA-1986 and subsequent
legislation. No final or temporary regulations under sec. 168
relating to the issues in the instant opinion have been issued.
                                                   (continued...)
                             - 55 -

Reg. 5940-5971 (Feb. 16, 1984).   Section 1.168-2(e), Proposed

Income Tax Regs., 49 Fed. Reg. 5946 (Feb. 16, 1984), provides in

pertinent part as follows "((e) Components and improvements--(1)

Component cost recovery not permitted.   In general, the

unadjusted basis of structural components (as defined in § 1.48-

1(e)(2)) of a building must be recovered as a whole.   Thus, the

same recovery period and method must be used for all structural

components, and such components must be recovered as constituent

parts of the building of which they are a part.   * * *"

[Emphasis added.])

     Accordingly, we conclude that the precedent that has been

developed to ascertain whether property constitutes eligible

section 38 property for purposes of ITC is equally applicable to

ascertain whether property constitutes section 1245 class

property for purposes of ACRS.    See also Schrum v. Commissioner,

T.C. Memo. 1993-124 (to the extent that property does not qualify

as eligible section 38 property under section 48, the property

cannot constitute section 1245 class property.)

40
   (...continued)
We recognize that the proposed regulations "carry no more weight
than a position advanced on brief by the respondent". Zinniel v.
Commissioner, 89 T.C. 357, 369 (1987), quoting F.W. Woolworth Co.
v. Commissioner, 54 T.C. 1233, 1265-1266 (1970).
                              - 56 -

     MACRS

     MACRS does not utilize the terms "section 1245 class

property" or "section 1250 class property".41   Rather, MACRS

assigns property to recovery periods on the basis of class lives.

To constitute 5-year property, the disputed property items must

have a class life of more than 4 years but less than 10 years.

Sec. 168(e)(1).   To constitute nonresidential real property, the

disputed property items must be section 1250 property with a

class life of more than 27.5 years.    Sec. 168(e)(2).

     Section 168(i)(12) provides that "The terms 'section 1245

property' and 'section 1250 property' have the meanings given

such terms by sections 1245(a)(3) and 1250(c), respectively."    As

we discussed supra, section 1250(c) excludes from the term

"section 1250 property", "section 1245 property, as defined in

section 1245(a)(3)".

     From that statutory provision, we conclude that, as with

ACRS, the MACRS statutory language manifests a congressional

intent to retain the prior law distinction between components

41
    Although the terms "section 1245 class property" and
"section 1250 class property" are not utilized in MACRS, as will
be discussed in more detail infra, the disputed property items
involved in the instant case for taxable years ended 1986 and
1987 would have constituted either section 1245 class property or
section 1250 class property, as applicable, had ACRS continued to
be in effect for those taxable years. Consequently, for
convenience, we continue to use the terms "section 1245 class
property" and "section 1250 class property", where appropriate,
to refer to property items for which MACRS applies as well as to
the property items for which ACRS applies.
                              - 57 -

that constitute section 1250 class property and property items

that constitute section 1245 class property.   The legislative

history of MACRS does not reveal a contrary intention.

     In support of the position that an analysis based on ITC is

inappropriate for cost recovery purposes, respondent relies on

language contained in Grinalds v. Commissioner, T.C. Memo. 1993-

66, that "the 'sole justification' test relates to the investment

tax credit, which has provisions and policies of its own, and it

provides only limited guidance, if any, in interpreting section

168(i)(6), the statute directly involved here."    The "sole

justification" test refers to the provision in section 1.48-2(e),

Income Tax Regs., which specifically excludes from the definition

of a structural component "machinery the sole justification for

the installation of which is the fact that such machinery is

required to meet temperature or humidity requirements which are

essential for the operation of other machinery."    Sec. 1.48-2(e),

Income Tax Regs.   In Grinalds, we did not focus on the definition

of section 1245 class property and section 1250 class property.

Therefore that case is distinguishable and inapplicable to the

issue of whether tangible property constitutes section 1245 class

property or section 1250 class property for purposes of ACRS and

MACRS.

     Based on the foregoing, we conclude that the tests developed

to ascertain whether property constituted tangible personal
                                - 58 -

property for purposes of ITC equally are applicable to decide

whether the property constitutes tangible personal property for

purposes of MACRS.   Accordingly, we conclude that, to the extent

a disputed property item would have qualified as tangible

personal property for ITC, that property also will qualify as

tangible personal property for purposes of ACRS and MACRS.

     Additional Arguments

     Respondent further contends that the tests developed to

decide whether property qualified for ITC are inapplicable to

ascertain ACRS recovery classes or MACRS recovery periods because

ITC and ACRS and MACRS accomplish their capital cost incentives

in a different manner and focus on different factors.

Respondent's arguments in support of that contention are premised

on the position that the ACRS and MACRS depreciation deductions

should be tied to the useful life of the property involved.    We

rejected a similar position in Simon v. Commissioner, 103 T.C.

247 (1994), affd. 68 F.3d 41 (2d Cir. 1995), and Liddle v.

Commissioner, 103 T.C. 285 (1994), affd. 65 F.3d 329 (3d Cir.

1995), and we reject it here.

     Other arguments raised by respondent in support of the

position that the tests used to ascertain whether property

qualifies as tangible personal property for ITC purposes are not

applicable for purposes of ACRS and MACRS also are without merit,

and we do not address them here.
                                - 59 -

     Respondent contends alternatively that all of the disputed

property items are structural components under an ITC analysis

and, consequently, constitute section 1250 class property.     We

now address that alternative position.

Classification of the Disputed Property Items as Section 1245
Class Property or Section 1250 Class Property.

     In General

     As discussed supra, the classification of disputed property

items as section 1245 class property, depreciable over a 5-year

recovery period, or section 1250 class property, depreciable over

the life of the related structure, depends upon a decision as to

whether the respective items constitute tangible personal

property within the meaning of section 1.48-1(c), Income Tax

Regs., which would be section 1245 class property, or structural

components of the buildings to which they relate within the

meaning of section 1.48-1(e)(2), Income Tax Regs., which would be

section 1250 class property.     See also secs. 1.1245-3(b)(1), (c),

1.1250-1(e)(3), Income Tax Regs.

     Tangible Personal Property

     The regulations define tangible personal property to include

"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)".     Sec. 1.48-1(c), Income Tax Regs.   Local law does

not control for purposes of determining whether property is or is
                                - 60 -

not "tangible" or "personal".    Id.     The term "tangible personal

property" is not intended to be defined narrowly and includes

assets accessory to the operation of a business.       Illinois Cereal

Mills, Inc. v. Commissioner, 789 F.2d 1234, 1237 (7th Cir. 1986),

affg. T.C. Memo. 1983-469; Metro Natl. Corp. v. Commissioner,

T.C. Memo. 1987-38; see also S. Rept. 1881, 87th Cong., 2d Sess.

(1962), 1962-3 C.B. 707, 858; Morrison, Inc. v. Commissioner,

T.C. Memo. 1986-129, affd. 891 F.2d 857 (11th Cir. 1990).42

     In Whiteco Indus., Inc. v. Commissioner, 65 T.C. 664, 672-

673 (1975), we listed the following factors to consider in

resolving whether property is inherently permanent and, thus, not

tangible personal property within the meaning of section 1.48-

1(c), Income Tax Regs.:   (1) Is the property capable of being

42
    S. Rept. 1881, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 707,
722, in defining "section 38 property" for purposes of the
investment tax credit, stated in pertinent part as follows:

     Except for the exclusions noted below, all tangible
     personal property qualifies as section 38 property.
     * * * Tangible personal property is not intended to be
     defined narrowly here, nor to necessarily follow the
     rules of State law. 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 credit. Similarly, assets of a
     mechanical nature, even though located outside a
     building, such as gasoline pumps, are to qualify for
     the credit. Real property (other than buildings and
     structural components) which qualifies as integral
     parts of categories referred to above includes such
     assets as blast furnaces, oil and gas pipelines,
     railroad track and signals, and fences used in
     connection with raising cattle.
                              - 61 -

moved, and has it in fact been moved? (2) Is the property

designed or constructed to remain permanently in place? (3) Are

there circumstances which tend to show the expected or intended

length of affixation, i.e., are there circumstances which show

that the property may or will have to be moved? (4) How

substantial a job is removal of the property and how time-

consuming is it?   Is it "readily removable"? (5) How much damage

will the property sustain upon its removal? and (6) What is the

manner of affixation of the property to the land?

     Movability itself is not the controlling factor in deciding

whether the property lacks permanence.   Kramertown Co. v.

Commissioner, 488 F.2d 728, 731 (5th Cir. 1974), affg. T.C. Memo.

1972-239; see also Consolidated Freightways v. Commissioner, 708

F.2d 1385, 1390 (9th Cir. 1983) (a variety of factors are

considered, including, where possible, the function and design of

the component in issue, the intent of the taxpayer in installing

the component, and the effect of removal of the component on the

building), affg. in part and revg. in part 74 T.C. 768 (1980);

Everhart v. Commissioner, 61 T.C. 328, 331 (1973) (moveability

per se does not determine whether or not property is personal

property); Dixie Manor, Inc. v. United States, 44 AFTR 2d 79-

5442, 79-2 USTC par. 9469 (W.D. Ky. 1979) (fact that walls often

are removed because of a change in design by itself is not

sufficient), affd. without published opinion 652 F.2d 57 (6th
                              - 62 -

Cir. 1981).   The fact that an item is not readily reusable in

another location is evidence supporting the conclusion that it is

to be treated as permanent in its present location.

Mallinckrodt, Inc. v. Commissioner, 778 F.2d 402, 403 (8th Cir.

1985), affg. per curiam   T.C. Memo. 1984-532.

     Structural Components

     Section 1.48-1(e)(2), Income Tax Regs., explains the meaning

of "structural components" by way of example rather than by

definition as follows:

          (2) 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 panelling or tiling; windows and doors; all components
     (whether in, on, or adjacent to the building) of a central
     air conditioning or heating system, including motors,
     compressors, pipes and ducts; plumbing and plumbing
     fixtures, such as sinks and bathtubs; electric wiring and
     lighting fixtures; chimneys; stairs, escalators, and
     elevators, including all components thereof; sprinkler
     systems; fire escapes; and other components relating to the
     operation or maintenance of a building. However, the term
     "structural components" does not include machinery the sole
     justification for the installation of which is the fact that
     such machinery is required to meet temperature or humidity
     requirements which are essential for the operation of other
     machinery or the processing of materials or foodstuffs.

Accordingly, an item constitutes a structural component of a

building if the item relates to the operation and maintenance of

the building.   Sec. 1.48-1(e)(2), Income Tax Regs.   The "sole

justification" test set forth in section 1.48-1(e)(1), Income Tax

Regs., excludes from the term "structural component" only

machinery that is required to meet the temperature and humidity
                                 - 63 -

requirements of other machinery.     See Piggly Wiggly S., Inc. v.

Commissioner, 84 T.C. 739, 750-753 (1985), affd. 803 F.2d 1572

(11th Cir. 1986); Texas Instruments, Inc. v. Commissioner, T.C.

Memo. 1992-306; Morrison, Inc. v. Commissioner, supra.

     Applying the foregoing general principles, we next consider

the appropriate individual categories for the disputed property

items.   Before we address the substantive issues, however, we

must decide an evidentiary matter which was raised at trial.

     At trial, petitioners objected to the admission of portions

of the report prepared by respondent's expert, Steve Wilgus (Mr.

Wilgus), which petitioners contend contains legal conclusions.

Respondent contends that the contested materials do not

constitute legal conclusions.     We took petitioners' objections

under advisement.

     Testimony of a witness qualified by knowledge, skill,

experience, training, or education is admissible whenever that

scientific, technical or other specialized knowledge will assist

the trier of fact to understand the evidence or to decide a fact

in issue.   Fed. R. Evid. 702.    Testimony that expresses a legal

conclusion and does not assist the trier of fact is not

admissible.   See Heflin v. Stewart County, Tenn., 958 F.2d 709,

715-716 (6th Cir. 1992); Davis v. Combustion Engg., Inc., 742

F.2d 916, 919 (6th Cir. 1984); Laureys v. Commissioner, 92 T.C.

101, 126-129 (1989); Weinstein's Federal Evidence, sec.
                                - 64 -

704.04[2][a], at 704-10-704-11 (2d ed. 1997); see also Fed. R.

Evid. 701, 702; Snap-Drape, Inc. v. Commissioner, 98 F.3d 194,

197-198 (5th Cir. 1996), affg. 105 T.C. 16 (1995); Berry v. City

of Detroit, 25 F.3d 1342, 1353-1354 (6th Cir. 1994); Molecular

Tech. Corp. v. Valentine, 925 F.2d 910, 919 (6th Cir. 1991);

Adalman v. Baker, Watts & Co., 807 F.2d 359, 365-368 (4th Cir.

1986).43

     We conclude that Mr. Wilgus' report states legal conclusions

applying law to facts and that those legal conclusion are not

helpful to the Court.    Consequently, we disregard them.44

     Additionally, in support of their respective positions, the

parties presented expert testimony at trial and in reports

concerning the nature of the disputed property items.    Expert

testimony may be in the form of an opinion or in the expression

of a dissertation or exposition of scientific or other principles

relevant to the case, which the finder of fact may apply to the

facts.     Fed. R. Evid. 702, advisory comm. note, 28 U.S.C. App. at

8871 (1994).    Opinion testimony of an expert not supported by an

adequate foundation of relevant facts, data, or opinions,

however, is inadmissible conjecture or speculation.    See Randolph

43
    See also Estate of Carpenter v. Commissioner, T.C. Memo.
1993-97.
44
    See also Shoney's S., Inc. v. Commissioner, T.C. Memo. 1984-
413 n.2, wherein we also disregarded legal conclusions contained
in a report prepared by Mr. Wilgus.
                              - 65 -

v. Laeisz, 896 F.2d 964, 967-968 (5th Cir. 1990); Twin City

Plaza, Inc. v. Central Sur. & Ins. Corp., 409 F.2d 1195, 1200

(8th Cir. 1969); Graham, Federal Practice and Procedure, sec.

6641, at 251-252 (Interim ed. 1992).   An expert may base an

opinion or inference on facts that the expert knows from first

hand observation, that are in the record and made known to the

expert, or that, although not in the record, are "of a type

reasonably relied upon by experts in the particular field in

forming opinions or inferences upon the subject."   Fed. R. Evid.

703; see also Ramsey v. Culpepper, 738 F.2d 1092, 1101 (10th Cir.

1984); In re Aircrash in Bali, Indonesia on April 22, 1974, 684

F.2d 1301, 1314 (9th Cir. 1982); Baumholser v. Amax Coal Co., 630

F.2d 550, 552-553 (7th Cir. 1980).

     Although otherwise inadmissible data underlying an expert's

opinion may be admitted at trial, the use of that data is limited

to explaining the expert's reasoning, and is not admitted as

substantive evidence.   Fed. R. Evid. 703, 705; Engebretsen v.

Fairchild Aircraft Corp., 21 F.3d 721, 728-729 (6th Cir. 1994);

United States v. Wright, 783 F.2d 1091, 1100 (D.C. Cir. 1986);

Paddack v. Dave Christensen, Inc., 745 F.2d 1254, 1261-1262 (9th

Cir. 1984).   Factual allegations that are not otherwise in the

record that are relied upon by an expert witness may be admitted

as substantive evidence only if proper foundational requirements

are satisfied; i.e., where the expert testifies from personal
                                - 66 -

knowledge of the facts relayed.    See Fed. R. Evid. 602.

Accordingly, to the extent that the testimony of an expert states

factual allegations that are not otherwise properly in the

record, i.e., no foundation was laid establishing that the

witness had an opportunity to observe and actually did observe

the fact to which the witness testified, we disregard such

testimony.

     Although we have considered and given due weight to the

conclusions of the experts, we do not set forth infra those

conclusions except where we believe it will help explain our

rationale for finding that a specific disputed property item

constitutes personal property or a structural component.    We turn

next to consideration of the appropriate categories for the

disputed items.

     1.45    Primary and Secondary Electrical Distribution Systems

     The primary and secondary electrical distribution systems

(Property Unit 1900) include the main panels, main motor control

centers, transformers, the secondary distribution panels, and

related wiring and conduit.    See supra pp. 9-12.   The parties

have stipulated to the portion of the electrical load conveyed by

the primary and secondary electrical distribution systems to

hospital equipment and to the portion conveyed to items related

45
    Our numbering of the groups of disputed property items
considered in this Opinion corresponds to the numbering utilized
by petitioners in their briefs.
                             - 67 -

to the operation and maintenance of petitioners' buildings.    See

supra p. 12.

     Petitioners contend that the portion of the primary and

secondary electrical distribution systems which carry electrical

loads to particular items of business equipment constitutes

section 1245 class property within the meaning of sections 1.48-

1(c) and 1.1245-3(b), Income Tax Regs., because that portion of

the electrical distribution systems does not relate to the

operation or maintenance of a building.    Respondent counters that

those disputed property items are structural components of the

buildings to which they relate because they are inherently

permanent and are not readily removable.

     Respondent agrees that our decision in Morrison, Inc. v.

Commissioner, supra, as affirmed by the Court of Appeals for the

Eleventh Circuit, provides authority for petitioners' position

that the primary and secondary electrical distribution systems

are not structural components to the extent of the load

percentages that the parties stipulated are carried to equipment.

Our holding in Morrison follows our holding in Scott Paper Co. v.

Commissioner, 74 T.C. 137, 186-187 (1980), that the portion of

the taxpayer's primary electrical distribution system which did

not relate to the overall operation or maintenance of buildings

constituted tangible personal property under section 48(a)(1)(A)

and therefore was eligible for ITC.   Respondent, however, urges
                                - 68 -

the Court to disavow Scott Paper Co. v. Commissioner, supra, and

its progeny, and instead to follow the reasoning of A.C. Monk &

Co. v. United States, 686 F.2d 1058, 1065-1066 (4th Cir. 1982)

(no justification for allocating portions of a single electrical

system; components of electrical system are structural components

if they can be reasonably adapted to general uses), or of

Illinois Cereal Mills, Inc. v. Commissioner, 789 F.2d at 1244

(electrical distribution system was "other tangible property"

under section 48(a)(1)(B)).46

46
     Absent a stipulation to the contrary, the instant case is
appealable to the Court of Appeals for the Sixth Circuit and
therefore is not controlled by the decisions of the Courts of
Appeals for the Fourth Circuit (A.C. Monk & Co. v. United States,
686 F.2d 1058 (4th Cir. 1982)) or Seventh Circuit (Illinois
Cereal Mills, Inc. v. Commissioner, 789 F.2d 1234 (7th Cir.
1986), affg. T.C. Memo. 1983-469). See Golsen v. Commissioner,
54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971). The
Court of Appeals for the Sixth Circuit has not decided the issue;
accordingly, we decide the instant case as we think proper.
Lardas v. Commissioner, 99 T.C. 490, 498 (1992).
     We note, however, that in Morrison, Inc. v. Commissioner,
891 F.2d 857, 863 n.* (11th Cir. 1990), the Court of Appeals for
the Eleventh Circuit stated as follows:

     *We note that only Scott Paper is directly on point. In
     Scott Paper, the Tax Court analyzed a primary electrical
     system to determine whether it partially qualified as
     tangible personal property under section 48(a)(1)(A). The
     Illinois Cereal and the Monk courts, however, discussed
     whether portions of primary electrical systems constituted
     other tangible personal property under section 48(a)(1)(B).
     Although the Illinois Cereal court stated at the end of its
     opinion that the taxpayer's primary electrical system did
     not constitute tangible personal property, the court did not
     squarely face the issue. See Illinois Cereal, 789 F.2d at
     1239 ("[Taxpayer] does not contend that its electrical
     distribution system is 'tangible personal property' under
                                                   (continued...)
                                - 69 -

      Respondent contends further that the disputed property items

in the subject category are distinguishable from the primary and

secondary electrical distribution property items involved in

Scott Paper Co. v. Commissioner, supra, because in that case the

electrical components were readily removable, they were not

inherently permanent, they were inextricably linked to and

installed in conjunction with the addition of particular pieces

of machinery, and most of the electricity carried by the

electrical components was conveyed to the new equipment.

      In Morrison, Inc. v. Commissioner, T.C. Memo. 1986-129, we

explained our rationale for finding a portion of the primary and

secondary electrical system in Scott Paper Co. eligible property

for ITC as follows:

      In Scott Paper Co., we concluded that the components of the
      taxpayer's primary electric system which supplied the
      electric needs of process machinery rather than contributing
      to the overall operation or maintenance of buildings, was
      not an inherently permanent structure and the taxpayers were
      entitled to the investment tax credit on these components.
      In reaching this conclusion we placed great emphasis on the
      language in section 1.48-1(e)(2), Income Tax Regs., which
      defines "structural components" by listing examples and
      including as the last line of the regulation "and other
      components relating to the operation or maintenance of a
      building." In Scott Paper Co., supra at 183, we
      characterized that phrase as follows:

46
     (...continued)
       section 48."   (Emphasis added)).

Thus, it is not clear whether Illinois Cereal actually supports
respondent's position.
                        - 70 -

     a descriptive phrase intended to present the basic
     test used for identifying structural components.
     The preceding elements are examples of items which
     meet the test as a general rule. Items which
     occur in an unusual circumstance and do not relate
     to the operation or maintenance of a building
     should not be structural components despite being
     listed in section 1.48-1(e)(2), Income Tax Regs.
     * * *

We also quoted the Technical Explanations of the Revenue Act
of 1962 which explained the language which was incorporated
in the regulation as follows:

     The term "structural components" of a building
     includes such parts of the building as central
     air-conditioning and heating systems, plumbing,
     and electric wiring and lighting fixtures,
     relating to the operation [or] maintenance of the
     building. [H. Rept. 1447, 87th Cong., 2d Sess.
     (1962), 1962-3 C.B. 503, 516; S. Rept. 1881, 87th
     Cong., 2d Sess. (1962), 1962-3 C.B. 843, 859.]

In accordance, we concluded that property fails to qualify
for the credit if it relates to the overall operation or
maintenance of a building rather than being used to aid in
the employment of a particular function or particular piece
of property. See Central Citrus Co. v. Commissioner, 58
T.C. 365, 374 (1972).

     We focused on the ultimate uses of power at the
taxpayer's facility in Scott Paper Co. and distinguished the
power used in the overall operation or maintenance such as
lighting, heating, ventilation and air-conditioning of the
building and the power used to operate the taxpayer's
machinery. Scott Paper Co. v. Commissioner, supra at 183-
184. We thus concluded in Scott Paper Co. that:

     To the extent that the primary electric carried
     electrical loads to be used for pulp and paper
     production processes or other such qualifying
     uses, the investment credit will be allowed for
     the primary electric improvements.
          To the extent that the primary electric
     improvements relate to the overall operation [or]
     maintenance of buildings, they are structural
     components of such buildings, and they do not qualify
     as tangible personal property.
                              - 71 -

     We find no material differences between the facts in the

instant case and those facts present in Scott Paper Co. v.

Commissioner, supra, and Morrison, Inc. v. Commissioner, supra,

relating to the primary and electrical distribution systems.     For

the reasons previous articulated in both of those case, we

conclude that the portion of the cost of the primary and

secondary electrical distribution systems in petitioners'

hospitals which is equal to the percentage of the electrical load

carried to those systems allocable to the hospitals' equipment,

as stipulated by the parties, constitutes section 1245 class

property, depreciable over a 5-year recovery period.

     2.   Branch Electrical Wiring and Connections and Special
          Electrical Equipment

     The branch electrical wiring and connections (hereinafter

branch wiring) relate to several items of hospital equipment and

are contained in many different property units including

controls, battery packs, and battery chargers for the emergency

power generation systems (Property Unit 2200); x-ray film

processing equipment (Property Unit 2244); illuminated emergency

entrance signs and illuminated hospital front entrance signs

(Property Unit 2320); medical gas control equipment and medical

gas alarm equipment (Property Unit 3026); hospital kitchen

equipment (Property Unit 3075); equipment located in the hospital

laboratory and maintenance shop areas (Property Unit 3195);

synchronously wired clock systems (Property Unit 3280); air
                              - 72 -

conditioners located in the hospital computer rooms (Property

Unit 3292); hospital central sterilization equipment (Property

Unit 3298); items of hospital equipment located in the operating

rooms, recovery rooms, intensive care units, infant nurseries,

radiology areas, patient rooms, laboratories, and kitchens

(Property Unit 4040).   See supra pp. 12-16.

     The parties have stipulated that 100 percent of the

electrical load carried by the branch wiring relating to the

controls, battery packs, and battery chargers for the emergency

power generation systems, the x-ray film processing equipment,

the illuminated emergency entrance signs and the illuminated

hospital front entrance signs, the medical gas control equipment

and medical gas alarm equipment, the synchronously wired clock

systems, the air conditioners located in the hospital computer

rooms, and the hospital central sterilization equipment, is

conveyed to the particular items of equipment to which they

relate.   The parties agree further that the branch wiring is

necessary and required for the operation and use of the items to

which they relate and, during the years in issue, was used only

with those items.   The parties additionally have stipulated that

all of the electrical receptacles in dispute are used to provide

localized electrical service for specific items of equipment

located in the kitchens, patient rooms, laboratories, and

maintenance shop areas of petitioners' hospitals, which equipment
                              - 73 -

respondent agrees is 5-year personal property.   We refer to the

branch wiring and special electrical equipment in issue in the

subject category collectively as the branch electrical systems.

     Petitioners contend that the branch electrical systems are

section 1245 class property pursuant to the reasoning of Scott

Paper Co. v. Commissioner, 74 T.C. 137 (1980), and its progeny,

as well as Rev. Rul. 66-299, 1966-2 C.B. 14.47   Petitioners

contend that the parties agree that virtually every item to which

the branch wiring relates was appropriately classified as section

1245 class property.

     Respondent, however, contends that the disputed property

items in the subject category are inherently permanent and are

identified as a structural component (electric wiring) in section

1.48-1(e)(2), Income Tax Regs.   On brief, respondent segregates

the disputed property items into individual segments of conduit,

electrical wiring, junction boxes, outlets, and receptacles.

47
     A revenue ruling reflects respondent's position on an issue
and is not binding precedent upon the Court. See Halliburton Co.
v. Commissioner, 100 T.C. 216, 232 (1993), affd. without
published opinion 25 F.3d 1043 (5th Cir. 1994); Stark v
Commissioner, 86 T.C. 243, 250-251 (1986); Neuhoff v.
Commissioner, 75 T.C. 36, 46 (1980), affd. 669 F.2d 291 (5th Cir.
1982). We disregard a revenue ruling, if it conflicts with the
statute it supposedly interprets, with the statute's legislative
history, or if it is otherwise unreasonable. E.g., Threlkeld v.
Commissioner, 848 F.2d 81, 84 (6th Cir. 1988), affg. 87 T.C. 1294
(1986). However, we may adopt its reasoning if we agree that the
ruling correctly applies the law. Estate of Lang v.
Commissioner, 64 T.C. 404, 406-407 (1975), affd. in part and
revd. in part 613 F.2d 770, 776 (9th Cir. 1980); Keating v.
Commissioner, T.C. Memo. 1995-101.
                              - 74 -

Respondent contends that the conduit is designed to remain in

place throughout its expected useful life, is identical to other

conduit which petitioners have agreed is a structural component,

and is typical of electrical conduit used at other commercial

establishments.   Respondent contends that the electrical wiring

is not designed or installed with a particular piece of

equipment, is not easily removable, and is not economically

practicable to reuse.   Respondent contends that none of the

electrical outlets, receptacles, and junction boxes are

inextricably linked to specific items of machinery, they are not

moved, they are typical of outlets, receptacles, and junction

boxes used in commercial facilities, and they relate to the

operation of the buildings in that they provide points for the

provision of power for many property items including employee

radios in the laboratories and power tools in the shop areas.

     As we understand respondent's position, respondent agrees

that the disputed property items in the subject category are

necessary for, and used exclusively with, the operation of

various items of equipment.   Nevertheless, respondent contends

that the branch electrical systems are structural components

because they were not designed for or installed with the specific

equipment to which they relate, they are adaptable for other

purposes, are composed of standard electrical supplies, have

useful lives not inextricably linked to the specific equipment
                               - 75 -

with which they are used, and are not readily removable.

Additionally, with regard to the electrical outlets, receptacles,

and junction boxes located in laboratory and shop areas,

respondent asserts that those disputed property items may be used

to power nonhospital equipment or equipment relating to the

operation or maintenance of the buildings.   To decide whether the

disputed property items in the subject category constitute

personal property or structural components of the buildings to

which they relate, we apply the reasoning in Scott Paper Co. v.

Commissioner, supra, and cases following its rationale.

     In Scott Paper Co. v. Commissioner, 74 T.C. at 182-183, we

noted that even though section 1.48-1(e)(2), Income Tax Regs.,

lists items such as "wiring and lighting fixtures" in describing

structural components, to constitute a structural component of a

building, the item nonetheless must relate to the operation or

maintenance of the building.   Subsequently, in Morrison, Inc. v.

Commissioner, T.C. Memo. 1986-129, we found that much of the

electrical distribution systems constituted personal property.

We stated:

     Respondent points out that the reasonable adaptability of
     the electrical distribution system with minimal effort to
     accommodate another cafeteria, a restaurant or a retail
     sales establishment such as a furniture store, indicates
     that the system relates to the overall operation or
     maintenance of the building rather than relating to the
     function of specific pieces of kitchen machinery or
     equipment. Respondent recognizes that his argument is
     contrary to our holding in Scott Paper Co., supra.
     Following our holding in Scott Paper Co. v. Commissioner, 74
                                - 76 -

        T.C. 137, 184 (1980), we focus on the ultimate use of the
        electrical power in petitioners' cafeterias in order to
        determine whether the electrical distribution system
        constitutes a structural component. An allocation should
        then be made based on the qualifying and nonqualifying uses
        of the power.

        Similarly, in Duaine v. Commissioner, T.C. Memo. 1985-39, we

analyzed various items of property contained in a fast food

restaurant to determine whether they qualified for ITC.    We

followed the reasoning of Scott Paper Co. v. Commissioner, supra,

in finding that electrical outlets and conduits that provided

localized power sources for the lessee's specialized restaurant

equipment constituted personal property.

     In Rev. Rul. 66-299, 1966-2 C.B. at 16, respondent concluded

that:

     special electrical or plumbing connections which are
     necessary to and are used directly with a specific item of
     machinery or equipment, or between specific items of
     individual, machinery or equipment, are not structural
     components of the building, but are essentially items of
     machinery or equipment, and qualify as section 38 property
     for investment credit purposes.

We analyzed that language in Central Citrus Co. v. Commissioner,

58 T.C. at 374, and stated:

        Such language creates a clear distinction between property
        used in the general overall operation of a building * * *
        and that property which is utilized to aid in the employment
        of a particular function or particular piece of property.
        We find this particular dichotomy to be both reasonable and
        sound and in agreement with congressional intent. * * *
        [Citations omitted.]

Accordingly, we held in Central Citrus Co. that distribution

system adapters, contractors, fuses, starters, switches, and
                              - 77 -

relays served specialized functions or specific equipment used in

the taxpayer's citrus fruit processing business and therefore

qualified for ITC.

     Respondent argues that the disputed property items

comprising the branch electrical systems are not identical to the

primary and secondary electrical systems involved in Scott Paper

Co. v. Commissioner, supra, and Morrison, Inc. v. Commissioner,

supra, or to the electrical connections involved in Duaine v.

Commissioner, supra, or to the "special electrical or plumbing

connections" described in Central Citrus Co. v. Commissioner,

supra, and Rev. Rul. 66-299, supra.    We, however, conclude that

there are no material differences among those items and the

disputed property items in the subject category.

     Respondent argues further that the wiring and conduit

located in the walls or floors of the hospitals are inherently

permanent because they are not movable.   Movability, however, is

not the sole determinant as to what constitutes section 1245

personal property.   Kramertown Co. v. Commissioner, 488 F.2d at

731; Consolidated Freightways v. Commissioner, 708 F.2d at 1390;

Everhart v. Commissioner, 61 T.C. at 331; Dixie Manor, Inc. v.

United States, 44 AFTR 2d at 79-5444 to 79-5446, 79-2 USTC par.

9469.   The fact 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.    We look
                              - 78 -

to the ultimate use of the electrical power conveyed by the

branch electrical systems to decide whether the disputed property

items constitute structural components or personal property.

Scott Paper Co. v. Commissioner, supra; Morrison, Inc. v.

Commissioner, supra.

     From the foregoing, we learn that a 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.

Conversely, to the extent that a disputed property item furnishes

electrical power for a function or equipment that does not relate

to the operation or maintenance of a building, the disputed

property item constitutes tangible personal property.     Scott

Paper Co. v. Commissioner, supra; Central Citrus Co. v.

Commissioner, supra; see also Texas Instruments, Inc. v.

Commissioner, supra; Morrison, Inc. v. Commissioner, supra;

Duaine v. Commissioner, supra.

     The x-ray film processing equipment (Property Unit 2244),

medical gas control equipment and medical gas alarm equipment

(Property Unit 3026), and hospital central sterilization

equipment (Property Unit 3298) aid in the rendition of healthcare

services and, therefore, the branch electrical systems relating

to that equipment do not relate to the operation or maintenance

of the buildings.   Branch electrical systems relating to items of
                             - 79 -

hospital equipment located in the operating room, recovery room,

intensive care units, infant nurseries, radiology areas, patient

rooms, laboratories, and kitchens (Property Unit 4040) also are

property items related to furnishing medical services rather than

to providing building services.   Accordingly, we hold that the

branch electrical systems relating to Property Units 2244, 3026,

3298, and 4040 constitute tangible personal property, and that

they are depreciable over a 5-year recovery period.

     The parties agree that the emergency generator (Property

Unit 2200) and emergency entrance signs and illuminated hospital

front entrance signs (Property Unit 2320) are 5-year property.

In our view, those items, as well as the hospital kitchen

equipment (Property Unit 3075), constitute assets accessory to

the conduct of petitioners' healthcare business, within the

meaning of S. Rept. 1881, 87th Cong., 2d Sess. (1962), supra,

1962-3 C.B. 707, 722, and, consequently, they do not relate to

the operation or maintenance of the buildings.   See Morrison,

Inc. v. Commissioner, supra (emergency lighting qualifies as

asset accessory to a business); S. Rept. 95-1263, at 117 (1978),

supra, 1978-3 C.B. (Vol. 1) 315, 41548 (special lighting,

48
    In connection with the enactment of the Revenue Act of 1978,
Pub. L. 95-600, 92 Stat. 2763, the report of the Senate Finance
Committee stated among other things as follows:

     the committee wishes to clarify present law by stating that
     tangible personal property already eligible for the
                                                   (continued...)
                               - 80 -

identity symbols, and signs (except billboards) are tangible

personal property).   The parties agree further that the computer-

room air conditioners (Property Unit 3292) are 5-year property,

presumably because they satisfy the "sole justification" test of

section 1.48-1(e)(2), Income Tax Regs,49 and they consequently

48
     (...continued)
       investment tax credit includes special lighting (including
       lighting to illuminate the exterior of a building or store,
       but not lighting to illuminate parking areas), false
       balconies and other exterior ornamentation that have no more
       than an incidental relationship to the operation or
       maintenance of a building, and identity symbols that
       identify or relate to a particular retail establishment or
       restaurant such as special materials attached to the
       exterior or interior of a building or store and signs (other
       than billboards). Similarly, floor coverings which are not
       an integral part of the floor itself such as floor tile
       generally installed in a manner to be readily removed (that
       is it is not cemented, mudded, or otherwise permanently
       affixed to the building floor but, instead, has adhesives
       applied which are designed to ease its removal), carpeting,
       wall panel inserts such as those designed to contain
       condiments or to serve as a framing for pictures of the
       products of a retail establishment, beverage bars,
       ornamental fixtures (such as coats-of-arms), artifacts (if
       depreciable), booths for seating, movable and removable
       partitions, and large and small pictures of scenery,
       persons, and the like which are attached to walls or
       suspended from the ceiling, are considered tangible personal
       property and not structural components. Consequently, under
       existing law, this property is already eligible for the
       investment tax credit. [S. Rept. 95-1263, at 117, 1978-3
       C.B. (Vol. 1) 315, 415.]

49
    Sec. 1.48-1(e)(2), Income Tax Regs., provides in pertinent
part as follows:

           the term "structural components" does not
           include machinery the sole justification for
           the installation of which is the fact that
                                                     (continued...)
                                - 81 -

also would not relate to the operation or maintenance of the

buildings.   See Piggly Wiggly S., Inc. v. Commissioner, 84 T.C.

at 748-756 (HVAC units installed to meet temperature and humidity

requirements of refrigeration equipment of grocery stores qualify

as tangible personal property).    The branch electrical systems

relating to those items of equipment similarly do not relate to

the operation or maintenance of petitioners' buildings.

Accordingly, we hold that the branch electrical systems relating

to Property Units 2200, 2320, 3292, and 3075 also constitute

tangible personal property, and that they are depreciable over a

5-year recovery period.

      The subject category also includes synchronously wired clock

systems (Property Unit 3280).    Petitioners' expert, William J.

Neiman (Mr. Neiman), states that the clock system, located

throughout the hospital, includes clocks, timers, and personnel

time recorders that insure continuity in timekeeping.    He

explains that the clock system is not found in most buildings but

49
     (...continued)
            such machinery is required to meet
            temperature or humidity requirements which
            are essential for the operation of other
            machinery or the processing of materials or
            foodstuffs. Machinery may meet the "sole
            justification" test provided by the preceding
            sentence even though it incidentally provides
            for the comfort of employees, or serves, to
            an insubstantial degree, areas where such
            temperature or humidity requirements are not
            essential.
                               - 82 -

typically only in facilities where the routine nature and

regularity of medical procedures is inherent to the business of

the facility.    Mr. Neiman further states that the timekeeping

system is necessary for monitoring the duration and frequency of

patient symptoms and timing the administration of medical

treatments.    Respondent's expert, Stephen A. Wilgus, discussed

the conduit, wiring, and electrical outlets comprising the branch

electrical systems, but he did not address the classes of assets

to which the disputed property items relate.    Although it seems

that synchronized timekeeping systems are not unique to the

healthcare business, we conclude that the synchronized clocks

relate to the operations carried on within petitioners' buildings

and not to the operation or maintenance of petitioners'

buildings.    Consequently, we hold that the branch electrical

systems relating to the synchronized clocks also constitute

personal property and that they also are depreciable over a 5-

year recovery period.

     Lastly, the subject category includes electrical outlets,

receptacles, and junction boxes located in laboratory and shop

areas.   To the extent that they are used to power employee

personal equipment or equipment relating to the operation or

maintenance of the buildings, they do not constitute personal

property.    Rather, they are structural components of the

buildings.    To the extent that they are used to power equipment
                              - 83 -

that is not employee owned or that does not relate to the

operation or maintenance of petitioners' buildings, however, they

do constitute personal property.   Petitioners, however, have not

produced evidence demonstrating which electrical outlets,

receptacles, and junction boxes are used for a qualified purpose,

and we have no basis to make that determination.   Accordingly, we

sustain respondent's determination that those disputed property

items must be depreciated over the same recovery period as the

building to which they relate.

     3.   Wiring and Related Property Items Relating to Television
          Equipment

     The disputed property items in the subject category

(Property Unit 2340) consist of wiring and related property items

that relate to the television antennae and television sets

located in the hospitals.   See supra pp. 16-17.

     Petitioners contend that the branch wiring relating to the

television equipment is section 1245 class property, depreciable

over 5-year periods, pursuant to the reasoning of Scott Paper Co.

v. Commissioner, supra, and its progeny, as well as Rev. Rul. 66-

299, 1966-2 C.B. 14.   Respondent contends that the disputed

property items in the subject category are inherently permanent

and are identified as a structural component (electric wiring) in

section 1.48-1(e)(2), Income Tax Regs.   The parties agree that

the master television antennae are 5-year property.
                                - 84 -

     We conclude for the reasons discussed supra relating to the

branch electrical systems that the branch wiring in the subject

category constitutes assets accessory to the conduct of

petitioners' healthcare business within the meaning of S. Rept.

1881 supra, 1962-3 C.B. at 722.    The disputed property items in

the subject category do not relate to the operation or

maintenance of the buildings.    Consequently, we hold that the

wiring and related property in Property Unit 2340 constitute

tangible personal property, depreciable over a 5-year recovery

period.

     4-5.   Conduit, Floor Boxes, Power Boxes and Outlet Jacks
            Relating to Telephone Equipment and Electrical Wiring,
            Conduit, and Connections Relating to Internal
            Communications Equipment

     The telephone equipment in the subject categories (Property

Unit 2330) includes conduit installed specifically to house the

telephone wiring, telephone floor boxes, telephone power boxes,

and telephone outlet jacks, which cannot be used for any purpose

other than as a connection point for petitioners' telephones.

See supra p. 17.   Respondent agrees that those items are required

for the use and operation of the telephones in petitioners'

hospitals and, during the years in issue, were used only with the

telephones and telephone equipment located in the hospitals.

     The internal communications equipment in dispute (Property

Unit 3090) consists of wiring and conduit, junction boxes,

outlets, and sleeves that are necessary for the operation of the
                              - 85 -

hospital intercom, dictation, paging, and nurse call systems.

See supra pp. 17-18.   During years ended 1985 through 1988, those

items were used only with those particular systems, and the

hospital blueprints indicate that the items are to be used

specifically with those systems.

     Respondent agrees that the telephone enclosures are properly

classified as personal property, but contends that the conduit,

floor boxes, power boxes, and outlets that are necessary for

petitioners to use the telephones and the enclosures constitute

structural components of a building.   We do not agree.

     The electrical connections in the subject categories are

necessary for the operation of telephones and internal

communications equipment and are used directly with the equipment

to which they relate, and, consequently, they are considered a

part of that equipment.   Scott Paper Co. v. Commissioner, supra;

Morrison, Inc. v. Commissioner, T.C. Memo. 1980-129.

Accordingly, we hold that the disputed property items in Property

Units 230 and 3090 constitute personal property and are

depreciable over 5-year periods.

     6.   Carpeting

     The carpeting (Property Unit 2140) was installed in the

hospital facilities during construction.   See supra p. 18.    It

was attached to the floors of the hospitals using a general
                              - 86 -

purpose latex adhesive.   Most of the carpeting already has been

removed.

     Petitioners contend that the carpeting was not a structural

component of petitioners' hospital buildings within the meaning

of section 1.48-1(e)(2), Income Tax Regs.    Petitioners contend

that the carpeting was easily removed, its removal did not damage

the concrete floors of the hospitals, and that, if necessary, the

carpeting could have been reinstalled in other locations with new

adhesives.   Additionally, petitioners contend that the carpeting

was not an integral part of, or a permanent covering for, the

hospital floors.   Petitioners further contend that section 1.48-

1(e)(2), Income Tax Regs., does not list carpeting as a

structural component of a building.    Accordingly, petitioners

contend, the carpeting must be an integral part of, and a

permanent covering for, the concrete floors of petitioners'

hospitals to constitute a structural component of a building

under section 1.48-1(e)(2), Income Tax Regs.

     Respondent contends that the carpeting constitutes a

structural component.   Respondent maintains that the carpet is

typical of carpeting used in other business and professional

facilities, is custom cut, is attached to the concrete flooring

by adhesives, is designed to remain in place until its useful

life is exhausted, provides a minimally acceptable floor finish,
                              - 87 -

would be damaged on removal, and is not reusable except for scrap

purposes.

     Petitioners counter that the carpeting in all material

respects is indistinguishable from the wall-to-wall carpeting

installed in guest rooms, office space, bar areas, and dining

rooms of a motel described in Rev. Rul. 67-349, 1967-2 C.B. 48.

In that Revenue Ruling, respondent ruled that the carpeting was

personal property for purposes of section 1.48-1(c), Income Tax

Regs., and not a structural component of a building.

     The carpeting described in Rev. Rul. 67-349 was fastened

with hooks attached to wood strips that were nailed along each

wall.   Rev. Rul. 67-349, 1967-2 C.B. at 48.   In holding that the

carpeting, installed over concrete floors, constituted personal

property, respondent explained:

          The "wall-to wall" carpeting installed in a building in
     the manner described above is not an integral part of the
     floor itself, and therefore, the carpeting is not a
     permanent covering for the floor. Thus, the "wall-to-wall"
     carpeting in the instant case is not a "structural
     component" within the meaning of the regulations. [Rev.
     Rul. 67-349, 1967-2 C.B. at 49.]

     Respondent contends that the carpeting involved in the

instant case is distinguishable from the carpeting described in

Rev. Rul. 67-349, supra, because it is more permanent, is

installed directly on an unsealed concrete slab by adhesive, and

is not reusable.   Petitioners counter that S. Rept. 95-1263,

supra, 1978-3 C.B. (Vol. 1) at 415, see supra note 48, expressly
                              - 88 -

and unequivocally recognized that all carpeting is personal

property and is not to be considered a structural component of a

building.

     Respondent contends, however, that the record does not show

that the carpeting involved in the instant case was installed

with adhesives designed to ease its removal as was the situation

in the example reflected in S. Rept. 95-1263, supra.   Respondent

relies on Minot Fed. Sav. & Loan Association v. United States,

313 F. Supp. 294, 296 (D.N.D. 1970), affd. 435 F.2d 1368 (8th

Cir. 1970), wherein the District Court stated:

     Carpeting is now considered a permanent covering and one of
     the recognized methods of permanently finishing floors for
     use. A finished floor, or permanent finished floor
     covering, is essential for the proper and necessary
     operation and maintenance of a building.

     We conclude that the carpeting involved in the subject

category is not materially different from the carpeting described

in Rev. Rul. 67-349, supra.   We are persuaded from the record

that the carpeting is not an integral part of the floor and

satisfies the criteria for tangible personal property outlined in

Whiteco Indus., Inc. v. Commissioner, 65 T.C. at 672-673.

Petitioners have shown that they did not intend for the carpeting

to be permanently affixed to the underlying floor and that much

of the carpeting already has been removed.   The carpeting was

attached with adhesives that facilitate ease of removal, and,

although the carpeting could have been reused in another
                                 - 89 -

location, it was discarded because of potential health hazards

resulting from its placement in hospital buildings.

     Respondent's reliance on Minot Fed. Sav. & Loan Association

v. United States, supra, is misplaced.     Carpeting was not in

issue in Minot.   In the passage quoted above and cited by

respondent, the District Court admonished the Government for

taking an inconsistent and contrary position (that removable

partitions were structural components) from the principles and

rationale of Rev. Rul. 67-349 (that "wall-to-wall" carpeting was

tangible personal property).     The District Court did not find

that carpeting per se constitutes a structural component.     The

Minot case, furthermore, predates the Senate Finance Committee

report for the 1978 Revenue Act wherein carpeting specifically is

identified as tangible personal property.     S. Rept. 95-1263,

1978-3 C.B. (Vol. 1) at 415.

     Based on the foregoing, we hold that the carpeting in the

subject category constitutes tangible personal property and that

it is depreciable over a 5-year recovery period.

     7.   Vinyl Wall Coverings

     The vinyl wall coverings (Property Unit 2380) in the subject

category are the original vinyl wall coverings placed in

petitioners' facilities during construction.     See supra p. 19.

     Petitioners contend that the vinyl wall coverings are not

structural components of petitioners' buildings, but are section
                               - 90 -

1245 class property used in petitioners' businesses and that they

are depreciable over 5-year periods.    Respondent contends that

the vinyl wall coverings are structural components of the

buildings.   Respondent maintains that the vinyl wall coverings

are an alternative for paint, they are intended to remain on the

walls during the useful life of the wall coverings, and they are

not readily removable or reusable.

     Section 1.48-1(e)(2), Income Tax Regs., includes as an

example of a structural component walls and permanent coverings

for them.    Petitioners contend that the vinyl wall coverings are

not intended or designed to be either integral parts of, or

permanent coverings for, the walls of petitioners' hospitals, but

are decorative coverings for those walls.    They are easily

removable, and in most instances, due to changes in the decor of

the hospitals and heavy wear, the vinyl wall coverings already

have been removed without damage to the walls of the hospitals.

Petitioners concede that wall coverings typically are not reused

in their entirety upon removal, but assert that portions of the

vinyl wall coverings could be removed in connection with area

repair work and then reattached to the walls.    Petitioners

contend that they used adhesives to attach the vinyl wall

coverings to the walls, and that method of attachment is

expressly recognized as being non-permanent in S. Rept. 95-1263,

1978-3 C.B. (Vol. 1) at 415 (see supra note 48).    Petitioners
                               - 91 -

contend that the decorative nature of the vinyl wall coverings

and the fact that "glue-sizing" was applied to the sheetrock

walls prior to placing the wall coverings on the walls also

indicate that they were intended to be temporary.      Petitioners

contend that the vinyl wall coverings are similar to the lattice

millwork in issue in Morrison, Inc. v. Commissioner, supra,

because they are "merely decorative ornamentation serving no more

than an incidental relationship to the operation or maintenance

of the building" and "could easily be removed without permanently

damaging the * * * walls".   Id.

     In Standard Oil Co. (Ind.) v. Commissioner, 77 T.C. 349, 405

(1981) (involving the eligibility for ITC of new service station

signs and lights), we stated that, for purposes of section

48(a)(1), "all tangible property constitutes 'tangible personal

property' unless it is excluded because it is land or an

'inherently permanent structure.'"      See also sec. 1.48-1(c),

Income Tax Regs.   To decide whether the service station signs and

lights constituted an inherently permanent structure, we applied

the criteria announced in Whiteco Indus., Inc. v. Commissioner,

65 T.C. at 671.    Standard Oil Co. (Ind.) v. Commissioner, supra.

     Additionally, in Duaine v. Commissioner, T.C. Memo. 1985-39,

for the purpose of deciding whether wall and floor tiles in a

building leased to a fast food restaurant constituted inherently

permanent structures, we applied the Whiteco criteria.      In
                               - 92 -

Duaine, we held that, because the tiles were glued to the

surfaces on which they were installed and because a building's

interior tiling was included specifically as a structural

component in section 1.48-1(e)(2), Income Tax Regs., the tiles

were a permanent covering for the restaurant's walls and floors.

Id.

       In contrast, we are persuaded that the vinyl wall coverings

involved in the subject category were not intended to be, and

were not, a permanent covering for the hospital walls.    The walls

were prepared with glue sizing to permit easy removal of the

vinyl wall coverings without damage to the walls.    The vinyl wall

coverings were attached with adhesives that also permitted easy

removal.    Indeed, much of the wall coverings was removed within 8

years of installation without significant damage to the walls or

to the wall coverings.

       Accordingly, we hold that the vinyl wall coverings in the

subject category constitute tangible personal property, and that

they are depreciable over a 5-year recovery period.

8.    Vinyl Floor Coverings

       The vinyl floor coverings and matching base cove molding

(Property Unit 2370) in the subject category are the floor

coverings originally placed in petitioners' hospital facilities

during construction.    See supra pp. 20-21.
                                - 93 -

     Petitioners contend that the vinyl floor coverings are not

an integral part of their buildings' floors, and, consequently,

they are not structural components but are section 1245 class

property depreciable over 5-year periods pursuant to S. Rept. 95-

1263, supra.   Petitioners contend that the floor coverings are

attached to the concrete floors using general purpose latex

adhesives so that they are not permanently affixed but are easily

removed without damage to the underlying floors, that petitioners

typically remove the vinyl floor coverings every 3 to 10 years,

and that most of the vinyl floor coverings in issue have been

removed already.   Petitioners further contend that the sheet

vinyl floor covering is a type of floor covering peculiar to

hospitals or other health care organizations, and that it is

section 1245 class property also because of its unusual nature.

See Scott Paper Co. v. Commissioner, 74 T.C. at 183.

     Respondent contends that the vinyl floor coverings are

structural components of the buildings to which they relate

because the flooring coverings are custom cut, not readily

removable, not reusable, typical of floorings used in other

business and professional facilities, attached to the concrete

flooring by adhesives, and designed to remain in place until

their useful lives are exhausted.

     The term "structural components" includes floors and any

permanent coverings for them.    Sec. 1.48-1(e)(2), Income Tax
                                 - 94 -

Regs.     S. Rept. 95-1263, supra, 1978-3 C.B. (Vol. 1) at 415,

however, identifies as personal property

        floor coverings which are not an integral part of the floor
        itself such as floor tile generally installed in a manner to
        be readily removed (that is it is not cemented, mudded, or
        otherwise permanently affixed to the building floor but,
        instead, has adhesives applied which are designed to ease
        its removal), * * *.

        Applying the Whiteco criteria, we conclude that the vinyl

floor coverings are not inherently permanent.     We are persuaded

that the floor coverings were not intended to be, and were not,

permanent coverings for the buildings' floors.     The floor

coverings were attached with adhesives to permit easy removal

without damage to the concrete floors.     Indeed, much of the floor

coverings was removed within 3 to 5 years of their installation

without damaging the underlying floors or vinyl floor coverings.

        Accordingly, we hold that the vinyl floor coverings

constitute tangible personal property, and that they are

depreciable over a 5-year recovery period.

        9-10.   Kitchen Water Piping, Kitchen Equipment Steam Lines,
                and Special X-Ray Plumbing Connections

        The kitchen water piping (Property Unit 3080) in the subject

category consists of the kitchen grease waste systems (or the

grease trap system) and plumbing connections serving specific

items of kitchen equipment.     See supra pp. 21-23.   The plumbing

connections branch off from a hospital's main water lines and

supply water directly to specific items of equipment located in
                                - 95 -

petitioners' kitchens, such as the dishwashers, coffee urns,

steam kettles, braising pans, and ice makers, they are necessary

for the operation of the kitchen equipment and are used solely

with the items of equipment to which they relate.   The kitchen

equipment steam lines (Property Unit 3070), are identical to the

kitchen plumbing connections.    The special plumbing connections

for the x-ray equipment (Property Unit 2244) are required for the

operation and use of the x-ray equipment and are used only with

that equipment.   See supra pp. 22-23.

     Petitioners contend that the kitchen water piping, the

kitchen equipment steam lines, and the x-ray equipment special

plumbing connections constitute personal property, depreciable

over 5-year periods.   Petitioners maintain that those disputed

property items do not relate to the operation or maintenance of a

building because of their relationship with the kitchen or x-ray

equipment.   They also contend that most commercial buildings do

not have kitchen grease waste systems, which are directly related

to petitioners' food preparation activities.   In support of their

contentions, petitioners rely on Scott Paper Co. v. Commissioner,

supra; Morrison, Inc. v. Commissioner, supra; Duaine v.

Commissioner, supra; Texas Instruments, Inc. v. Commissioner,

supra; Central Citrus Co. v. Commissioner, supra; and Rev. Rul.

66-299, 1966-2 C.B. 14.   Petitioners contend that our reasoning

in Morrison, Inc. v. Commissioner, supra, wherein we found that
                              - 96 -

the kitchen drainage system and kitchen water piping constituted

personal property, is squarely applicable to the instant case.

     Respondent contends that the disputed property items are

structural components.   Respondent agrees that the disputed

property items are factually similar to property items involved

in Morrison, Inc. v. Commissioner, supra.   Respondent asserts,

however, that in Morrison the taxpayers had argued that the

kitchen water piping was eligible for ITC as "other tangible

property".   Respondent contends that a holding that the disputed

property items are "other tangible property" would result in

those items constituting section 1250(c) property because

petitioners are not involved in an activity enumerated in section

1245(a)(3)(B).   Respondent additionally maintains that the

disputed property items are not unique to hospitals.

     The terms "plumbing and plumbing fixtures" are listed

specifically in section 1.48-1(e)(2), Income Tax Regs., as

constituting structural components of a building.   Nonetheless,

in Morrison, Inc. v. Commissioner, supra, we focused on the use

of the kitchen drains and concluded that the kitchen drainage

system did not relate to the operation or maintenance of a

building but rather constituted personal property because it

directly serviced the taxpayers' equipment and machinery.

Similarly, we concluded that the cafeterias' kitchen water piping

was necessary to and used directly with specific pieces of
                               - 97 -

equipment and consequently did not relate to general building

plumbing.    Id.; see also Texas Instruments, Inc. v. Commissioner,

supra; Duaine v. Commissioner, supra.    The facts in the instant

case relating to the disputed property items in the subject

categories are not materially distinguishable from the facts in

Morrison, Inc. v. Commissioner, supra, and Duaine v.

Commissioner, supra.

     The disputed property items in the subject categories relate

to the operation of specialized kitchen or hospital equipment.

That equipment is related to petitioners' business of providing

healthcare services.    As such, the disputed property items are

assets accessory to petitioners' business and, consequently, they

do not constitute structural components of the buildings.    E.g.,

Scott Paper Co. v. Commissioner, supra; Morrison, Inc. v.

Commissioner, supra; Duaine v. Commissioner, supra; Texas

Instruments, Inc. v. Commissioner, supra; Central Citrus Co. v.

Commissioner, supra.

     Accordingly, we hold that the kitchen water piping, kitchen

equipment steam lines, and special x-ray plumbing connections are

personal property, and that they are depreciable over 5-year

recovery periods.

     11.    Kitchen Hoods and Exhaust Systems

     Kitchen exhaust hoods, exhaust fans, supply air intake fans

and related duct work, and dishwasher condensate return units

constitute Property Unit 3085.    See supra pp. 23-25.   The exhaust
                                - 98 -

hoods and exhaust systems dissipate air and smoke produced by the

ranges and cooking equipment located in the kitchens, ventilate

the air in the kitchen areas of petitioners' hospitals in order

to ensure the proper operation of petitioners' kitchen equipment,

replace the air expelled from the kitchens, and remove steam and

humidity expelled by petitioners' kitchen dishwashers in order to

keep the dishwashers operating properly.    The kitchen hoods and

exhaust systems do not serve to ventilate areas of the hospitals

other than the kitchen areas.    The dishwasher exhaust fans and

related duct work operate solely to exhaust steam and other

vapors from the dishwashers.    The dishwasher condensate return

units are dedicated solely to providing emergency hot water for

the hospital dishwashers.   The piping is attached to the hospital

buildings and runs directly from a dishwasher to a boiler and

back to the dishwasher.

     Petitioners contend that the disputed property items in the

subject category are not structural components of a building, but

are section 1245 class property, depreciable over 5-year periods.

Petitioners maintain that removal of the disputed property items

would not affect the hospitals' main water piping or sanitary

drainage.   Petitioners contend that those items do not relate to

general building plumbing and thus do not relate to the operation

or maintenance of a building.    Petitioners rely on the "sole

justification" test of section 1.48-1(e)(2), Income Tax Regs., to

support their contention that the kitchen hoods and exhaust
                             - 99 -

systems and the dishwasher condensate return units constitute

personal property within the meaning of section 1.48-1(c), Income

Tax Regs., and therefore of section 1.1245-3(b), Income Tax Regs.

     Respondent contends that the disputed property items are

structural components of the buildings to which they relate.

Respondent contends that the items are not unique to hospitals,

are adaptable to other uses, are securely attached to the

building structure, and provide more than incidental benefit and

comfort to petitioners' kitchen employees.   Specifically,

respondent contends that the dishwasher condensate return unit is

more closely related to the boiler than the dishwasher.

     In Morrison, Inc. v. Commissioner, T.C. Memo. 1986-129, we

held that the cafeterias' kitchen air ventilation system

constituted personal property, based on the "sole justification"

test of section 1.48-1(e)(2), Income Tax Regs.   Respondent agrees

that the kitchen hoods and exhaust systems, but not the

dishwasher condensate return unit, are very similar to items

involved in Morrison.

     For the reasons previously discussed in Morrison, Inc. v.

Commissioner, supra, we agree with petitioners that the kitchen

hoods and exhaust systems, as well as the dishwasher condensate

return units, satisfy the "sole justification" test of section

1.48-1(e)(2), Income Tax Regs.   The evidence presented by

petitioners establishes that the kitchen hoods and exhaust

systems were installed only to meet temperature or humidity
                              - 100 -

requirements essential for the operation of petitioners' kitchen

equipment and they provide only incidental benefit to

petitioners' employees.   The dishwasher condensate return units

and related piping were installed solely to provide emergency hot

water for petitioners' dishwasher equipment.   The disputed

property items in the subject category consequently do not

constitute structural components of petitioners' buildings.

Morrison, Inc. v. Commissioner, supra; Duaine v. Commissioner,

supra; sec. 1.48-1(e)(2), Income Tax Regs.

     Accordingly, we hold that the disputed property items in the

subject category constitute personal property, and that they are

depreciable over 5-year recovery periods.

     12.   Patient Corridor Handrails

     Patient corridor handrails (Property Unit 3190) are

handrails placed along the patient corridors of petitioners'

hospital facilities to assist patients.   See supra pp. 25-26.

The handrails can be removed from the walls by removing the bolts

holding them in place, and their removal would not damage the

hospital walls.   In some instances, the handrails have been

removed.

     Petitioners contend that the patient corridor handrails

constitute section 1245 class property, depreciable over 5-year

periods.   Additionally, petitioners contend that the disputed

property items in the subject category are peculiar to hospitals

and other medical facilities and that they do not relate to the
                              - 101 -

operation or maintenance of the buildings.   Petitioners further

contend that the patient corridor handrails are analogous to the

vault doors, record vault doors, night depository facilities, and

walk-up and drive-up teller's windows that, in Rev. Rul. 65-79,

1965-1 C.B. 26, constituted personal property within the meaning

of section 1.48-1(c), Income Tax Regs., because the items were

accessory to the banking business.   Petitioners contend that

patient corridor handrails are clearly distinguishable from

bumper guards which are used to protect the hospital walls and

which have been treated as relating to the operation of

petitioners' buildings.   Petitioners contend further that the

patient corridor handrails are reusable.

     Respondent contends that the patient corridor handrails are

structural components because they relate to the operation and

maintenance of the hospital buildings.   Respondent agrees that

the handrails are removable but asserts that they generally are

not reusable.   Respondent does not agree that the patient

corridor handrails relate to the provision of healthcare

services.   Respondent asserts that they protect walls, similar to

bumper guards, and provide support for anyone needing it, similar

to handrails in stairwells.

     Section 1.48-1(c), Income Tax Regs., provides that all items

contained in or attached to a building constitute personal

property, unless they constitute structural components of a

building.   Section 1.48-1(e)(2), Income Tax Regs., provides that,
                                - 102 -

for a property item to constitute a structural component of a

building, it must relate to "the operation or maintenance of a

building."   In Scott Paper Co. v. Commissioner, 74 T.C. at 183,

we stated that "Items which occur in an unusual circumstance and

do not relate to the operation or maintenance of a building" are

not structural components of a building.      Moreover, assets that

are accessory to a business constitute tangible personal

property.    Metro Natl. Corp. v. Commissioner, T.C. Memo. 1987-38;

S. Rept. 1881, supra, 1962-3 C.B. at 722.

     We are persuaded that the patient handrails are placed in

patient corridors to aid hospital patients who might need support

and that they are not intended to function as wall protectors.

We conclude that the handrails are assets accessory to

petitioners' business of providing healthcare services within the

meaning of S. Rept. 1881, supra, 1962-3 C.B. at 722.

Consequently, we hold that the handrails do not constitute

structural components and that the patient corridor handrails

therefore constitute personal property that must be depreciated

over 5-year recovery periods.

     13.    Overbed Lights and Related Electrical Connections

     The overbed lights (Property Unit 4050) in the subject

category are fluorescent light fixtures placed directly over the

patient beds.    See supra pp. 26-27.     The lights are activated

from the bedside by a doctor, nurse, or other hospital employee

in connection with examining, bathing, or preparing a patient for
                              - 103 -

surgery.   General reading lights, vanity lights, night lights,

and large double-pane windows provide other illumination for the

patient rooms.

     Petitioners contend that the overbed lights are not

structural components of their buildings, but that they are

section 1245 class property, depreciable over 5-year recovery

periods.   Petitioners assert that the overbed lights are not

intended or designed to be used for basic patient room

illumination, they are used solely by doctors, nurses, and staff

in examining patients and providing health care services, and

that they are accessory to petitioners' businesses.   Petitioners

further contend that the overbed lights fit the description of

special lighting delineated in S. Rept. 95-1263, supra, 1978-3

C.B. (Vol. 1) at 415, and, therefore, the overbed lights

constitute section 1245 class property.

     Respondent contends that the overbed lights are structural

components of the buildings to which they relate.   Respondent

also contends that the overbed lights are permanently installed

in the ceiling of the buildings, provide general room

illumination, and are identical to other fluorescent lights in

the hospital buildings.   Additionally, respondent disputes

petitioners' assertion that the overbed lights are used

exclusively by healthcare professionals.

     Section 1.48-1(e)(2), Income Tax Regs., includes "electric

wiring and lighting fixtures" as an example of a structural
                                - 104 -

component.    Nonetheless, in S. Rept. 95-1263 (see supra note 48)

Congress recognized that "special lighting" which has no more

than an incidental relationship to the operation or maintenance

of a building constitutes personal property.      E.g., Metro Natl.

Corp. v. Commissioner, supra (decorative lighting and plant grow

lights).     Lighting which serves as an accessory to a business

also constitutes personal property.       Id. (security lighting

illuminating the outside perimeter of a building housing a

psychiatric facility).    In Morrison v. Commissioner, T.C. Memo.

1986-129, we held that the taxpayers' emergency lighting

constituted personal property and noted that lighting fixtures

and electrical connections that "do not provide basic

illumination" and that are "accessory to a business" do not

constitute structural components of a building.       Id.

     Respondent contends that the overbed lights are not similar

to the emergency lights involved in Morrison, Inc. v.

Commissioner, but are ordinary fluorescent fixtures which provide

general room illumination.    We agree.

     We are not persuaded that the overbed lights are "special

lighting" within the meaning of S. Rept. 95-1263, supra, 1978-3

C.B. (Vol. 1) at 415, or that they constitute an asset accessory

to a business within the meaning of S. Rept. 1881, supra, 1962-3

C.B. at 722.    The overbed lights are standard 4-tube florescent

light fixtures placed in the acoustical ceilings of the hospital

buildings.    Photographs contained in the record reveal that the
                              - 105 -

overbed lights provide basic room illumination and have more than

an incidental relationship to the operation or maintenance of

petitioners' buildings.   There is no indication in the record

that petitioners intended the overbed lights to be temporary.    In

our view, removal of the light fixtures would affect the

integrity of the building.

     Accordingly, we hold that the overbed lights are structural

components of the buildings which constitute section 1250 class

property, and that, consequently, they are depreciable over the

same recovery periods as the buildings to which they relate.

     14.   Partitions

     The partitions (Property Unit Number 3240) in the subject

category are accordion-style room dividers placed in conference

rooms or cafeterias on tracks attached to the ceilings of

petitioners' hospitals.   See supra pp. 27-28.   They are used to

divide areas of large rooms into smaller areas where conferences

and luncheons are held.   The partitions are manufactured on

assembly lines and are available as catalog items from

manufacturers.   None of the partitions bears any structural load.

The partitions are removable and at least one of them has been

removed from one of petitioners' hospital facilities and is

currently in storage.   Removal of the partitions does not affect

the essential structure of the hospital buildings.

     Petitioners contend that the partitions do not constitute

structural components of the buildings to which they relate
                              - 106 -

because they are not permanent and are not an integral part of

the building structure but constitute personal property,

depreciable over 5-year periods.   Petitioners contend that the

partitions are similar to the decorative lattice millwork in

Morrison, Inc. v. Commissioner, supra, and the movable partitions

in Minot Fed. Sav. & Loan Association v. United States, 435 F.2d

1368 (8th Cir. 1970), and King Radio Corp. v. United States, 486

F.2d 1091 (10th Cir. 1973), which were held to constitute section

1245 class property.

     Respondent contends that the partitions are structural

components.   Respondent maintains that, because the disputed

property items are not easily reusable because of the substantial

support system they require, the partitions are factually

distinguishable from the partitions involved in Morrison, Inc. v.

Commissioner, supra, Minot Fed. Sav. & Loan Association v. United

States, supra, and King Radio Corp., Inc. v. United States,

supra.   We do not agree.

     The words "partitions" and "doors" are listed in section

1.48-1(e)(2), Income Tax Regs., as items that generally

constitute structural components of a building.   Nonetheless, in

Morrison, Inc. v. Commissioner, supra, we stated that doors

constitute a structural component of a building "only if they are

a permanent part of the * * * building, so that their removal

would affect the essential structure of the building."    Relying

on S. Rept. 95-1263, supra, 1978-3 C.B. (Vol. 1) at 415, we found
                                - 107 -

that decorative lattice millwork in the taxpayers' restaurants,

which served to separate the customer serving line from the

dining portions of the cafeteria and which was not used to

provide structural support for the cafeteria's ceiling, was

personal property because "The lattice millwork could easily be

removed without permanently damaging the underlying ceiling or

walls".   Morrison, Inc. v. Commissioner, supra.

     We are persuaded that the partitions in the subject category

are not inherently permanent.    The partitions are designed to

subdivide cafeterias and conference rooms into smaller eating or

meeting space.   They provide no structural support for the

ceilings or walls.   The partitions are capable of being moved,

and have been removed, without damage to the building or to the

partitions.   Their removal would not affect the operation or

maintenance of the buildings.    The partitions have no more than

an "incidental relationship" to the overall operation or

maintenance of the buildings.     Morrison, Inc. v. Commissioner,

supra; S. Rept. 95-1263 supra, 1978-3 C.B. (Vol. 1) at 415.       But

cf. Texas Instruments, Inc. v. Commissioner, T.C. Memo. 1992-306

(window walls were structural components); L.L. Bean, Inc. v.

Commissioner, T.C. Memo. 1997-175 (storage rack systems were

structural components).

     Accordingly, we hold that the partitions are personal

property, and that they have a 5-year recovery period.
                              - 108 -

     15.   Patient Bathroom Accessories and Plastic Mirrors

     Bathroom accessories (Property Unit 2360) and plastic

mirrors (Property Unit 2385) in the subject category include soap

dispensers, mirrors, towel racks, grab bars, toilet paper

holders, bathrobe hooks, shower curtain rods, and toiletry

shelves, contained in the patient room bathrooms50 of

petitioners' hospital facilities.   See supra pp. 28-29.    The

accessories are movable and removable.

     Petitioners contend that accessories located in patient room

bathrooms are an integral part of petitioners' provision of

healthcare services to their patients and are not related to the

overall operation or maintenance of a building but constitute

section 1245 class property, depreciable over 5-year periods.

Petitioners assert that the bathrooms are designed specifically

to be used only by petitioners' patients, and that they are in

addition to the public bathrooms and the employee bathrooms that

are contained in most types of buildings and which are necessary

for the operation of the buildings.

     Petitioners maintain that the bathrooms and related bathroom

accessories are an accessory to the hospital business because

hospitals and other health care organizations must provide each

patient with access to a bathroom without having to enter the

50
    Petitioners concede that bathroom accessories located in
employee, staff, and visitor rest rooms relate to the operation
or maintenance of petitioners' buildings.
                               - 109 -

general patient corridor area.   Petitioners rely on Scott Paper

Co. v. Commissioner, 74 T.C. at 183, in support of their

contention that the disputed property items do not relate to the

operation or maintenance of a building and should not be

considered structural components because the bathroom accessories

are items which occur in an unusual circumstance.

     Respondent contends that the bathroom accessories constitute

structural components of the buildings to which they relate.

Respondent asserts that the bathroom accessories are permanent,

designed to remain in place for their useful lives, and are not

economically reusable if they are removed.   Respondent contends

that the number of bathrooms or type of people who utilize the

bathroom accessory does not change the nature of the disputed

property items.   Respondent denies that the patient bathroom

accessories occur in unusual circumstances, pointing to hotels,

motels, and apartment buildings that also contain a large number

of bathrooms in comparison to the number of bathrooms contained

in typical office buildings.

     Although we agree with petitioners that most office

buildings do not contain one bathroom for each one-to-two persons

who will be served by the business conducted within the building,

we do not agree that the large number of patient bathrooms serve

a function unique to petitioners' business or that they are

assets accessory to the business of providing healthcare
                                  - 110 -

services.    See Morrison, Inc. v. Commissioner, supra, where we

found that restroom accessories such as vanity cabinets and

counters, even though required by local occupancy codes to be

greater in number than other business buildings, were not

accessory to the taxpayers' restaurant business but constituted

structural components of a building.

     We conclude that the bathroom accessories constitute

structural components of the buildings.     Although capable of

being removed and reused, there is no evidence that at the time

they were installed petitioners ever intended to remove and reuse

the bathroom accessories.    We are persuaded that the bathroom

accessories are and were intended to be a permanent part of the

buildings.    The bathroom accessories also serve a function that

is more than incidental to the operation of the building.

     Accordingly, we hold that the bathroom accessories are

structural components of the buildings to which they relate and

therefore constitute section 1250 class property, and that they

are depreciable over the same recovery period as the buildings.

     16.    Acoustical Ceilings

     Acoustical ceiling tiles and related grid work in

petitioners' hospitals comprise Property Unit 2260.     See supra

pp. 29-30.    The acoustical ceilings are movable and removable,

and their removal does not damage the building structure.
                              - 111 -

     Petitioners contend that the acoustical ceilings are not

structural components of petitioners' hospital buildings, but

constitute section 1245 class property, depreciable over 5-year

periods.   Petitioners assert that the acoustical ceilings serve

needs peculiar to the operation of their hospital businesses

because they prevent dust and dirt particles that accumulate on

the duct work and pipes located between the acoustical ceilings

and the structural ceilings of petitioners' hospitals from

falling into the areas below, and that they also absorb sound.

     Respondent contends that the acoustical ceilings are

structural components.   Respondent maintains that the acoustical

ceilings are virtually identical to the acoustical ceilings

involved in Metro Natl. Corp. v. Commissioner, T.C. Memo. 1987-

38, and Texas Instruments, Inc. v. Commissioner, supra, which we

found constituted structural components.

     Section 1.48-1(e)(2), Income Tax Regs., includes ceilings as

examples of structural components.   We recognized in Morrison,

Inc. v. Commissioner, supra, however, that the reference to

ceilings in the regulation means inherently permanent ceilings.

     Petitioners contend that, because the acoustical ceilings in

those cases did not serve the taxpayer's particular business

needs, the facts in the instant case are distinguishable from

those involved in Metro Natl. Corp. v. Commissioner, supra, and

Texas Instruments, Inc. v. Commissioner, T.C. Memo. 1992-306.
                                - 112 -

Petitioners maintain that the acoustical ceilings involved in the

subject category are analogous to the vault doors, walk-up and

drive-up teller's windows, and teller's booth installed by a bank

which respondent held constituted tangible personal property

within the meaning of section 1.48-1(c), Income Tax Regs.,

because their removal would not affect the continued operation of

the bank building as a building, even though their removal would

necessitate making repairs to the building and could affect the

continued operation of the bank's business.      Rev. Rul. 65-79,

1965-1 C.B. 26.

     We conclude that the acoustical ceilings are not materially

distinguishable from the false ceilings described in Metro Natl.

Corp. v. Commissioner, supra, or the suspended ceilings depicted

in Texas Instruments, Inc. v. Commissioner, supra.      Movability is

only one characteristic to be considered in determining whether

property is a structural component.       Everhart v. Commissioner, 61

T.C. 328, 331 (1973).   We are persuaded that the acoustical

ceilings were designed and intended to be a permanent part of the

buildings and that their removal would affect the operation of

the buildings in which they were installed.      We do not think that

the incidental benefit of trapping some dust and dirt and

providing sound reduction is sufficient to convert the ceilings

into assets accessory to petitioners' healthcare business as

petitioners contend they are.    The acoustical ceilings serve a
                                - 113 -

function that is more than incidental to the operation and

maintenance of the buildings.

     Accordingly, we hold that the acoustical ceilings are

structural components of petitioners' buildings and therefore

constitute section 1250 class property and that they are

depreciable over the same recovery periods as the buildings to

which they relate.

     17.   Steam Boilers and Related Accessories

     The steam boilers and the related accessories (Property Unit

3193) in the subject category provide heat for petitioners'

buildings and provide high-pressure steam essential to the

operation of particular items of equipment located in

petitioners' hospital facilities, such as humidifiers, air make-

up units, and central sterilization equipment.     See supra p. 31.

     Petitioners contend that the boilers are personal property,

depreciable over 5-year periods.    Petitioners assert that

production of high-pressure steam necessary for the operation of

the hospitals' sterilizers and humidifiers is the primary reason

for the boiler's existence, and that heating the building is an

incidental function.   Accordingly, petitioners contend, the

boilers satisfy the "sole justification" test of section 1.48-

1(e), Income Tax Regs.

     Respondent contends that the boilers and accessories are

components of a heating system and thus constitute structural
                              - 114 -

components because they relate to the operation or maintenance of

the hospital buildings.   Respondent maintains that the boilers

are designed to generate hot water and pressurized steam

primarily for heating purposes and secondarily for use in various

hospital equipment.   Respondent also asserts that the boilers

are not removable or reusable.

     Section 1.48-1(e)(2), Income Tax Regs., includes as an

example of a structural component "all components (whether in,

on, or adjacent to the building) of a * * * heating system,

including motors, compressors, pipes and ducts."      Specifically

excluded, however, is "machinery the sole justification for the

installation of which is the fact that such machinery is required

to meet temperature or humidity requirements which are essential

for the operation of other machinery * * *".    Id.

     Petitioners contend that the steam boilers are, in all

material respects, the same as the boiler facility analyzed in

Rev. Rul. 70-160, 1970-1 C.B. 7.   In that ruling, a furniture

manufacturer constructed a separate boiler facility to produce

steam for use directly in the furniture manufacturing process,

for heating make-up air needed to maintain proper humidity and

temperature conditions in the machine, veneer, and cabinet room

areas of the factory, and for incidental heating of other areas

of the main factory and adjacent buildings.    Id.    Respondent

ruled that the boiler facility (excluding the building)
                                - 115 -

constituted personal property because it satisfied the "sole

justification" test inasmuch as the boiler facility was

"designed, constructed, and operated for the essential purpose

and primary function of steam production, in order to furnish

additional air, and to provide the required temperature and

humidity requirements essential in the manufacture of the

furniture."    Id. at 8.   Respondent contends that Rev. Rul. 70-160

is inapposite because heating the buildings was the primary

purpose for the boilers.

     We are not persuaded that the boilers in the subject

category were designed, constructed, and operated solely to

provide steam for the operation of petitioners' hospital

equipment and that heating the buildings is merely an incidental

function of the boilers.    We also do not agree with respondent

that producing high-pressure steam for petitioners' equipment is

an incidental function of the boilers.    Based on the record, we

conclude that the boilers were installed to, and did, serve dual

functions.    There is no evidence that petitioners had any other

heating system for their building outside of the subject boilers.

Heat is essential for the operation of buildings.    However, we

also are convinced that high-pressure steam is essential for the

operation of certain hospital equipment.    Under the circumstances

present in the instant case, we find that both providing heat for

the buildings and providing high-pressure steam for the hospital
                              - 116 -

equipment are essential functions of the boilers, and that

neither function is incidental to the other.    Accordingly, the

"sole justification" test is not satisfied.    See sec. 1.48-

1(e)(2), Income Tax Regs.

     Based on the foregoing, we conclude that the boilers are

analogous to the electrical distribution system involved in Scott

Paper Co. v. Commissioner, 74 T.C. 137 (1980).    The record,

however, does not demonstrate the percentage of the steam

produced by the boilers that is used to operate hospital

equipment.   Consequently, we have no "logical and objective

measure" of the portion of the boilers that would constitute

section 1245 personal property.   See Scott Paper Co. v.

Commissioner, supra at 165.   Accordingly, we sustain respondent's

determination that the boilers must be depreciated over the same

period as the buildings to which they relate.

     To reflect the foregoing,

                                         Appropriate orders

                                    will be issued.