Schrum v. C.I.R.
| Decision Date | 01 September 1994 |
| Docket Number | No. 93-1814,93-1814 |
| Citation | 33 F.3d 426 |
| Parties | -6174, 94-2 USTC P 50,451 Jake Z. SCHRUM; Ruby E. Schrum; Dannie L. Schrum; Jeanette V. Schrum; Donald L. Moore; Judith A. Moore, Petitioners-Appellants, v. COMMISSIONER of the INTERNAL REVENUE SERVICE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Donald L. Moore, Hampton, VA, argued, for appellant.
Randolph L. Hutter, Tax Div., U.S. Dept. of Justice, Washington, DC, argued (Michael L. Paup, Acting Asst. Atty. Gen., Gary R. Allen, Kenneth L. Greene, on brief), for appellee.
Before RUSSELL, Circuit Judge, CHAPMAN, Senior Circuit Judge, and TILLEY, United States District Judge for the Middle District of North Carolina, sitting by designation.
Affirmed in part, vacated in part, and remanded by published opinion. Judge DONALD RUSSELL wrote the opinion, in which Senior Judge CHAPMAN and Judge TILLEY joined.
This case raises the question of whether self-service carwash facilities, or portions thereof, qualified under an old version of the tax code for an investment tax credit and for treatment normally accorded personal property for depreciation purposes. The tax court upheld the determination of the Commissioner that only in small measure was this the case. We affirm in part, vacate in part, and remand.
The relevant facts are not in dispute and are presented in the opinion of the tax court below, Schrum v. Commissioner, 1993 T.C.M. (RIA) p 93,124, 1993 WL 91293 (Mar. 30, 1993) (Wells, J.). We summarize them here.
Appellants-taxpayers Jake Z. Schrum, Dannie L. Schrum and Donald L. Moore were the general partners of Peninsula Enterprises ("Peninsula"), a Virginia general partnership. During the 1980's, Peninsula constructed four carwashes, acquired four other carwashes, and operated all eight carwashes as its primary business.
With the exception of the number of bays, all the facilities are substantially identical and were specifically designed to function as self service carwashes. The facilities are constructed of metal, brick and concrete. Customers may select water with or without soap added, and may select a low or high water pressure. The facilities are fully self-service; although the partnership retains a maintenance crew which maintains all its facilities, crew members do no work for customers.
The carwash facilities have larger than normal water supply meters and drain lines and have electricity and gas supplies. The water and electricity are used only in running the equipment.
With the exception of two carwash facilities, the ends of the bays are completely open; the two for which this is not the case have walls extended like a 'T' which lead customers into the bays. None of the carwash facilities has doors on the bays. Additionally, the bays do not have foundations which would support a wall or door on the open ends.
Vertical walls separate the bays from one another. These walls prevent customers from spraying water into the next bay and guide water down to the sloped floor, under which are located, as described below, water collection tanks. Also, the walls partially enclose vaults which contain coins deposited by customers. Mounted on the walls are the coin meters and switches, electrical wires to the switches, brackets for the wands used by the customers to direct the water onto their cars, and the hoses which lead to the wands. The mat holders and high and low pressure piping for each bay are also mounted on the walls. Attached to the top of the walls are beams which provide necessary structural reinforcement at the top of each wall. Mounted from the beams are booms, swivels, and hoses which provide the water to the customers, as well as the electrical lines and high pressure pipes.
For cosmetic purposes, the partnership installed a thin aluminum or galvanized tin (depending on the facility) cover on top of the beams. The cover, which is not watertight, is attached to the beams without seals and contains holes for pipes to gain access into the bays.
Beneath each bay are located two underground tanks for collecting and removing dirt and sediment from the water. Two tanks are apparently required to remove adequately sediments from the wastewater in order that the wastewater can, consistent with each local municipality's requirements, be discharged into the municipality's sewage system. Atop the settling tanks sit sloped, reinforced concrete slabs with grates which direct the wastewater into the tanks.
Each carwash facility has a single equipment room, the same size as a single bay. The equipment room contains the main pumps, electrical switching gear, water heaters, boilers, compressors, soap tanks, secondary circulating pumps, motors, mixing tanks, rinse tanks, controls, timers, water softeners, valves, circuit breakers, and electrical panels. The equipment rooms are used solely to house equipment and are not insulated or air-conditioned; minimal heating is provided, however, so as to heat the water and prevent pipes from freezing during winter. The rooms have neither windows nor other ventilation. The carwash facilities have no rest rooms.
During the tax years 1984 through 1987, taxpayers 1 claimed investment tax credits based upon their investments in the carwashes 2 and depreciated some of the carwashes over a five year depreciation period under the Accelerated Cost Recovery System ("ACRS") elucidated in I.R.C. Sec. 168. The Commissioner disallowed much of the claimed credit, required depreciation over a far longer period, and imposed negligence and overstatement penalties. After trial, the tax court upheld the Commissioner's action.
Taxpayers' carwashes were put into service in 1984, 1985 and 1986. Under the version of the Internal Revenue Code in effect during the years at issue, 3 I.R.C. Sec. 38 allowed for taxpayers placing property in service which qualified as so-called 'section 38 property' to take an 'investment tax credit', as calculated under I.R.C. Sec. 46. 4 The term 'section 38 property' was defined broadly in I.R.C. Sec. 48(a)(1), in relevant part, as follows:
Except as provided in this subsection, the term "section 38 property" means--
(A) tangible personal property (other than an air conditioning or heating unit), or
(B) other tangible property (not including a building and its structural components) but only if such property--
(i) is used as an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services....
I.R.C. Sec. 48(a)(1).
Taxpayers advance two arguments in support of their position that the carwash facilities are section 38 property. First, they assert that the facilities, or portions thereof, qualify as "tangible personal property" under section 48(a)(1)(A). Second, they argue that, even if that is not the case, the facilities, or parts thereof, are "other tangible property ... used as an integral part of ... water [and] sewage disposal services" under section 48(a)(1)(B)(i).
The IRS has set out the standards for application of section 48 in Treasury Regulation Sec. 1.48-1. The IRS promulgated this regulation A.C. Monk & Co. v. United States, 686 F.2d 1058, 1060 n. 2 (4th Cir.1982) (quoting Kramertown Co. v. Commissioner, 488 F.2d 728, 730 (5th Cir.1974)). This regulation, therefore, guides our analysis in this case.
Our analysis consists of two steps. We first address taxpayers' contention that the carwash facilities in their entirety qualify as section 38 property, under either subparagraph of I.R.C. Sec. 48(a)(1). Concluding that not to be the case, we then consider whether the tax court properly upheld the Commissioner's determination that only certain portions of the facilities qualify as section 38 property.
We first determine whether taxpayers' facilities qualify as section 38 property under section 48(a)(1)(A), which defines the class of "tangible personal property." Treasury Regulation Sec. 1.48-1(c) guides our inquiry and provides, in pertinent part:
Local law shall not be controlling for purposes of determining whether property is or is not "tangible" or "personal".... [T]he term "tangible personal property" means any tangible property except land and improvements thereto, such as buildings and other inherently permanent structures (including items which are structural components of such buildings or structures).... Tangible personal property includes all property (other than structural components) which is contained in or attached to a building.... 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.
For purposes of our discussion here, we need only isolate one rule from the foregoing: "buildings and other inherently permanent structures" cannot qualify as "tangible personal property" unless they are property "in the nature of machinery." See Weirick v. Commissioner, 62 T.C. 446, 452-53, 1974 WL 2764 (1974). 5
In accordance with these rules, we first examine the carwash structures to determine whether they are inherently permanent structures; we conclude that they are. This conclusion means that, if the carwash facilities in their entirety are to qualify as ...
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