A. C. Monk & Co., Inc. v. U.S.

• Decision Date: 27 August 1982
• Docket Number: Nos. 81-1986,81-2037,s. 81-1986
• Parties: 82-2 USTC P 9551 A. C. MONK & COMPANY, INC., Appellee, v. The UNITED STATES of America, Appellant. A. C. MONK & COMPANY, INC., Appellant, v. The UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1058

686 F.2d 1058

82-2 USTC P 9551

A. C. MONK & COMPANY, INC., Appellee, v. The UNITED STATES of America, Appellant.

A. C. MONK & COMPANY, INC., Appellant, v. The UNITED STATES of America, Appellee.

Nos. 81-1986, 81-2037.

United States Court of Appeals Fourth Circuit.

Argued May 4, 1982.

Decided Aug. 27, 1982.

James R. Trotter, Rocky Mount, N. C., for A. C. Monk & Co., Inc.

William A. Whitledge, Tax Div., Dept. of Justice, Washington, D. C. (Samuel T. Currin, U. S. Atty., Raleigh, N. C., Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Robert T. Duffy, Tax Div., Dept. of Justice, Washington, D. C., on brief), for the United States.

Before WINTER, Chief Judge, PHILLIPS, Circuit Judge, and CLYDE H. HAMILTON, United States District Judge for the District of South Carolina, sitting by designation.

JAMES DICKSON PHILLIPS, Circuit Judge:

The Internal Revenue Code allows an investment tax credit for tangible property used as an integral part of manufacturing or used for the bulk storage of fungible commodities, but specifically excludes "a building and its structural components" from the tax credit. I.R.C. § 48(a)(1)(B). The issues in this case require us to determine whether various parts of a tobacco processing plant of the taxpayer A.C. Monk & Company (Monk or taxpayer) are properly to be considered buildings or their structural components (giving Monk no tax credit); or, alternatively, other kinds of structures that are used as integral parts of manufacturing or for bulk storage (giving the credit). On cross-appeals by the Government and the taxpayer we affirm in part, reverse in part, and vacate and remand for further proceedings in part.

I

During 1971-72, Monk, a major tobacco exporter, designed and built in Farmville, North Carolina, a new plant in which to store and process tobacco. It included, inter alia, a large room used to receive, re-grade and store the tobacco bought at auction (green storage room); a raised, concrete railroad dock to load and unload railroad cars; electrical systems providing power for both lighting and machinery; and a section of raised roof to accommodate the height of the hogshead loader and press machinery (the high bay).

On its 1972-75 tax returns, Monk claimed investment tax credits for numerous portions of the new facility, including those above identified. The IRS disallowed certain of the claims and assessed and collected a larger tax. Monk then sued for refund of the disputed amount. Following a bench trial, the district court determined that Monk was entitled to the tax credit in respect of nine items disallowed by the IRS, and was not entitled to the credit in respect of three others. The Government's appeal challenges only three of the nine determinations adverse to it: those related, respectively, to the high bay, the railroad dock, and a portion of the electrical system. Monk's appeal challenges only one of the three determinations adverse to it: that related to the green storage room.

For reasons that follow, we affirm the district court's determination that Monk was not entitled to the credit for the green storage room; we reverse its determinations that Monk was entitled to the credit for the high bay, and the railroad dock; and we remand for reconsideration its determination that Monk was entitled to the credit for a portion of the electrical system. With respect to each of the latter three determinations we conclude that the district court erred as a matter of law in its application of the controlling statute and regulations to the facts as found.

II

Congress enacted the investment tax credit provisions to create incentives that would increase employment and spur productivity and output by the formation of capital equipment. In not allowing credits for investments in buildings and their structural components, ¹ Congress felt that businesses would respond more greatly to net price reductions in integral manufacturing and production machinery than in buildings and that such investments would further the economy-spurring goals of the tax credit more than would investments in buildings. See H.R.Rep.No.1447, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 405, 413.

In exempting buildings and their structural components from the investment tax credit, Congress intended that the term "building" be accorded its "commonly accepted meaning, that is, a structure or edifice enclosing a space within its walls, and usually covered by a roof." H.R.Rep.No.1447, 87th Cong., 2d Sess. (1962-3 C.B. 405, 516). Accord, S.Rep.No.1881, 87th Cong., 2d Sess. (1962-3 C.B. 707, 858). The house and senate reports gave as examples of the purposes of buildings, "to provide shelter or housing or to provide working ... space." Id.

Treasury Department regulation ² § 1.48-1(e)(1) uses this Congressional language in defining the term "building." In applying the definition, courts have consistently rejected a simple appearance test, see, e.g., Brown-Forman Distillers Corp. v. United States, 499 F.2d 1263, 1269-71 (Ct.Cl.1974), but rather insist that a structure both appear and function like a building to be a building for purposes of IRC § 48(a)(1)(B). The appearance prong comes from the sentence in the regulation (tracking language in the house and senate reports) that a building "generally means any structure or edifice enclosing a space within its walls, and usually covered by a roof...." Treas.Reg. § 1.48-1(e)(1). The function prong comes from language in the continuation of that sentence: "the purpose of which is, for example, to provide shelter or housing, or to provide working, office, parking, display, or sales space." Id.

The division among the reported cases comes in determining the scope of this function test. Some courts have determined that any structure providing shelter or work space, etc., functions as a building. See Consolidated Freightways, Inc. v. United States, 620 F.2d 862 (Ct.Cl.1980) (trucking docks are buildings); Yellow Freight System, Inc. v. United States, 538 F.2d 790 (8th Cir. 1976) (same). Other courts have reasoned that a structure, even if it provides shelter or work space, is nevertheless not necessarily a building if it is a specialized structure not reasonably adaptable to other possible uses. See Thirup v. Commissioner, 508 F.2d 915 (9th Cir. 1974) (greenhouse not a building); Brown & Williamson Tobacco Corp. v. United States, 369 F.Supp. 1283 (W.D.Ky.1973), aff'd per curiam on reasoning of district court, 491 F.2d 1258 (6th Cir. 1974) (tobacco storage sheds not buildings). See also Catron v. Commissioner, 50 T.C. 306 (1968) (refrigerated cold-storage area of hut not a building); Palmer Olson, T.C. M. P 70,296 (1970) (P-H) (quonset structures storing grain not available for credit because can store seed, fertilizer, or farm equipment).

We conclude that Congress intended that the adaptability of a structure to other uses should be a factor-along with its appearance and the purpose it presently serves-in determining whether the structure is a building and therefore ineligible for the investment tax credit. Congress intended to encourage investment in productive equipment-to which highly specialized structures can be linked-as being most important in increasing productivity and output. But cf. Consolidated Freightways, Inc. v. United States, 620 F.2d at 872 (rejecting this argument as not providing "much assistance" in drawing line between buildings and other structures). More importantly, Treasury Regulation § 1.48-1(e)(1), from which the appearance and function tests are derived, seems to limit the definition of building in this way. Although including as buildings structures such as "apartment houses, factory and office buildings, warehouses, barns, garages, railway or bus stations, and stores," the Regulation excludes structures so closely related to productive property that they "could not be economically used for other purposes." The Regulation gives as examples of non-buildings "oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples." The distinction between the two types of structures is best seen in the relatively general purpose nature of the former.

Additionally, Congress has extended the investment credit to "single purpose agricultural or horticultural structures," I.R.C. § 48(a)(1)(D) & (p) (as amended by the Revenue Act of 1978, Pub.L.No.95-600, § 314, 92 Stat. 2763, 2827-28 (applicable to tax years ending after August 15, 1971) ). This indicates a Congressional intent that single purpose structures not be viewed as buildings under I.R.C. § 48(a)(1)(B).

A

Applying these general definitions and policies to the "high bay" at issue here, we conclude that the high bay is a structural component of Monk's factory building. To accommodate the hogshead press and loader machinery, Monk designed an 80 by 90 foot section of its roof to be raised 15 feet above the 20 foot high roof covering the rest of the factory. The four sides and roof of this addition are made of sheet metal, the roof being covered with tar and gravel and the sides being bolted to the rest of the factory frame. Parts of this machinery not needing protection from the weather extend even higher than the raised roof.

Following the outline of Regulation 1.48-1(e)(1), the district court reasoned that the high bay obviously was specifically designed to house the hogshead machinery and could not be used for any other purpose. The court recognized that it might not be absolutely necessary to dismantle the high bay if Monk ceased to use the machinery, but opined that the energy costs of heating and cooling the extra space may make it desirable to dismantle it. It therefore concluded that the high bay was not a structural component of Monk's factory building but rather an integral part of its manufacturing process-and thus eligible for the investment tax credit.

In our...