Gibson & Associates, Inc., (2011)

Docket Number: 5863-08

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Gibson & Associates, Inc., (2011)

136 T.C. No. 10

UNITED STATES TAX COURT GIBSON & ASSOCIATES, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 5863-08. Filed February 24, 2011.

P is an engineering and heavy construction company that primarily erects or rehabilitates streets, bridges, airport runways, and other related real property (collectively, real property). P's rehabilitation services relate mainly to real property that is substantially dilapidated or damaged from a casualty. P also repairs and maintains real property. P reported on its Federal income tax return for the taxable year ended June 30, 2006, that its receipts are 'domestic production gross receipts' (DPGR) eligible for a deduction under sec. 199, I.R.C., and claimed a $63,435 deduction under that section. R determined in the notice of deficiency that none of P's receipts qualified as DPGR.

Held: P's receipts are DPGR to the extent P erected or substantially renovated real property, and the extent to which P substantially renovated real property turns on whether P's activities with respect to each freestanding item of real property that operated and performed a discrete function in and of itself: (1) Materially increased the value of the real property, (2) substantially prolonged the useful life of the real property, and/or (3) adapted the real property to a different or new use.

Held, further, P's activities materially increased the value of the real property, substantially prolonged the useful life of the real property, and/or adapted the real property to a different or new use to the extent that P's activities were not repairs (within the meaning of sec. 263(a), I.R.C.), unrelated to P's primary business.

Held, further, P's activities did not materially increase the value of the real property, substantially prolong the useful life of the real property, and/or adapt the real property to a different or new use to the extent that P's activities repaired or otherwise maintained real property unrelated to P's primary business.

Charles D. Lieser, for petitioner. George E. Gasper, for respondent.

PARIS, Judge: Petitioner petitioned the Court to redetermine respondent's determination of a $21,568 deficiency in its Federal income tax for its taxable year ended June 30, 2006 (subject year). The deficiency results from respondent's determination that petitioner may not deduct $63,435 under section 199(a).1 Respondent disallowed that deduction after determining that petitioner had no 'domestic production gross 1Unless otherwise indicated, section references are to the Internal Revenue Code of 1986 (Code), as amended, and Rule references are to the Tax Court Rules of Practice and Procedure. Dollar amounts are rounded.

receipts' (DPGR) within the meaning of section 199(c)(4). Petitioner reported that its DPGR totaled $26,053,570.2

Respondent now concedes that petitioner had DPGR of $13,849,246, and petitioner concedes that it incorrectly reported $259,156 of the $26,053,570 as DPGR.3 We decide whether the remaining $11,945,168 ($26,053,570 - $13,849,246 - $259,156) (disputed amount) is DPGR. We hold it is to the extent stated herein.

FINDINGS OF FACT Some facts were stipulated. The stipulation of facts and the exhibits submitted therewith are incorporated herein by this reference. Petitioner is a family-owned corporation that reports its income and expenses on the basis of a fiscal year ending on June 30. Its principal place of business was in Texas when its petition was filed.

2As relevant here and discussed infra, the deduction under sec. 199(a) equals 3 percent of the lesser of a taxpayer's qualified production activities income (QPAI) or the taxpayer's taxable income (as computed without the deduction under sec. 199(a)), and a taxpayer's QPAI equals the taxpayer's DPGR less the sum of its cost of goods sold (allocable to the DPGR) plus certain expenses and other items. Petitioner's reported deduction of $63,435 equals 3 percent of its reported taxable income (as computed without the deduction).

3Petitioner reported that its DPGR totaled $26,053,570 but now asks the Court to find that its DPGR totaled $25,794,414 (i.e., $259,156 less than reported). Petitioner concedes explicitly that $98,455 of the $259,156 is not DPGR, and we consider petitioner also to concede that the remaining $160,701 ($259,156 - $98,455) is not DPGR as well.

Petitioner is an engineering and heavy highway construction company that primarily erects or rehabilitates streets, bridges, airport runways, and other major components or substantial structural parts of real property (primarily, infrastructure) in Texas, Oklahoma, Arkansas, and Kansas. Petitioner specializes in structural rehabilitation, epoxy injection, concrete paving, bridge jacking, lead abatement, and protective coatings. Petitioner also maintains and repairs infrastructure and other real property.

Petitioner works through its employees. During the subject year, petitioner employed approximately 90 in...

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